While J.C. Penney (JCP) has struggled for awhile, there’s some hope that Q4 2018 may show signs of sales stabilization. That would be a welcome situation as it would enhance confidence that Jill Soltau will have at least a few years to attempt to turn around J.C. Penney.
Gross margins are likely to be pretty weak in Q4 2018, but various data points indicate that there’s a reasonable chance that J.C. Penney may be able to deliver flat to slightly positive comps in the quarter.
Parking Lot Data
Orbital Insight mentioned that its parking lot data showed that J.C. Penney’s traffic was up 10% year-over-year from Black Friday to Dec. 9. I’m not sure how well correlated this data is with actual results, as Orbital Insight had noted relatively strong parking lot numbers for J.C. Penney in March 2016, but J.C. Penney’s sales suffered a slowdown in that month.
On the other hand, Orbital Insight’s data for J.C. Penney at the end of 2016 and early 2017 tracked actual results pretty well. Orbital Insight mentioned that J.C. Penney’s traffic was down 5% in Q4 2016, while J.C. Penney’s comps were down -0.7% during the quarter (the difference was significantly narrowed by online sales growth). It also mentioned that J.C. Penney’s traffic was down -10% for Q1 2017 (up to late February), and J.C. Penney’s February comps ended up at an estimated -7.7%.
| Q4 2016 | Q1 2017 (Partial) | |
| JCP Comps | -0.7% | -7.7% |
| Orbital Insight | -5% | -10% |
Although I wouldn’t expect J.C. Penney’s comps to end up at 10% or better for Q4 2018 (especially with its year-over-year online sales performance being negative in Q3 2018), J.C. Penney may be on track to have a pretty solid quarter even if one allows for a large difference between the parking lot traffic numbers and the actual comps. J.C. Penney did forecast gross margins to be weak in Q4 2018, so bargain hunting may be boosting traffic numbers.
The idea of a fairly strong holiday season is backed up by the retail reports to date. November retail sales beat forecasts and were up the most in a year. The National Retail Federation also previously released an upbeat forecast for the holiday season.
Weather Effects
The weather has been favorable to the sales of cold weather apparel this year. Warm fall weather has often been blamed for lower-than-expected apparel sales, but this year has been cooler than 2017 so far, which in turn was cooler than 2016.
One measure that I use is the NOAA population-weighted heating and cooling degree data. The table below shows net heating degree days (heating degree days minus cooling degree days) for October, November and the first couple weeks of December. A higher number indicates colder overall temperatures.
| 2017 | 2018 | |
| Oct Net HDD | 122 | 187 |
| Nov Net HDD | 465 | 582 |
| Dec Net HDD (first two weeks) | 330 | 349 |
October 2018 was colder than October 2017, and J.C. Penney did mention that it saw better results in October when it got colder, although overall October came in below J.C. Penney’s sales plan.
J.C. Penney also indicated that it expected negative comps for Q4 2018, although probably not as bad as in Q3 2018. This was from mid-November though, and the second half of November was considerably cooler than the first part of November on a year-over-year basis, so that may boost J.C. Penney’s results a bit.
Conclusion
Expectations are pretty low for J.C. Penney’s Q4 2018 results after its weak Q3 2018 results and its discussions about how Q4 2018 comps were expected to be negative. Various data points indicate that J.C. Penney has good odds of beating those low expectations though. Parking lot data shows 10% year-over-year traffic growth for J.C. Penney, and the retail environment appears to be strong this holiday season. As well, the fall weather has been a positive for cold-weather apparel.
As a result, I think that J.C. Penney may be able to get flat to slightly positive comparable store sales growth in Q4 2018. Gross margins are still likely to be pretty weak though as it continues to deal with its inventory situation.
This sort of result won’t get J.C. Penney out of trouble by itself, but it would result in more stability as Jill Soltau attempts to implement changes and turn around J.C. Penney.
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Disclosure: I am/we are long JCP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Long JCP via KTP
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