$JCP: McGough Called It Right

(Editor's note: This JCP summation comes from Hedgeye Retail Sector Head Brian McGough. The stock is up over 5% in pre-market trading.)

 

As expected, there’s good and bad in the JCP quarter, but the net read is positive. What we were looking for was improvement in both the P&L and the balance sheet, and we got ‘em both.

 

1)    The bad, Gross margins were down 300 basis points in the quarter, as JCP cleared away inventory overhand from 1H and stepped up its promotional cadence.

2)    The good news is that promos worked, and sales improved sequentially throughout the quarter. Dot.com sales were up 24.5%.

3)    EPS of ($1.81) missed the Street’s ($1.70) but the reported number includes a $0.73 loss associated with a tax valuation allowance.

4)    JCP voluntarily repaid $200mm on its revolver. That’s not behavior one would expect from a company about to file Chapter 11.

5)    Guidance for 4Q includes; 1) additional sequential improvement in top line and gross margin – and both positive vs last year, 2) DOWN sg&a versus last year, and liquidity to be in excess of $2bn.

6)    That final point on liquidity is the most important. The big bears out there had estimates for year-end liquidity of $1.5bn to $1.8bn. Again, companies with stocks going to zero don’t take up liquidity estimates.

7)    Our bet is that a third of sell side noted share the same title today ‘turning a corner’. This will be the quarter people will point to in hindsight as evidence that JCP is actually a viable company.

 

FLASHBACK: Here was McGough's take last week ahead of the report.


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