Analysis: Despite setback, management taking Penney in right direction
JCP ended its last fiscal on a moderately upbeat note — especially on the profit front, where it managed to push into the black. These first quarter results change the mood music to a much more somber tone and undoubtedly represent a setback in the company's recovery plans.
The 3.7% decline in overall sales, and the 3.5% decline in comparable sales which accompanies it, come off the back of weak comparatives from the prior year. Most of this slip is down to the fact that JCP failed to attract customers to its stores, especially during the early part of the quarter when traffic across the industry was weak. Although this trend eased toward the back end of the quarter, it underlines how important it is that JCP constantly markets itself, and communicates the changes it is making, to shoppers.
Many of the changes are paying dividends, even if their positive impact is overshadowed by weaknesses elsewhere in the business. The appliance category, for example, has seen growth and we believe this will continue to build as rivals like Sears struggle. A reinvigorated home offer, including improved store layouts and merchandising, has also been a success. The problem is that, on their own, neither of these initiatives has enough firepower to turn around the entire business.
A bigger gun that does give JCP more firepower is Sephora. At the end of last year, the Sephora shop-in-shop concept was in 577 JCP stores. Across this year, Sephora will be added to around 70 more stores. Moreover, all locations will be enhanced with the introduction of new beauty brands and, in the case of some stores, the addition of more selling space. The impact of having a popular beauty player as part of the offer cannot be underestimated. Without it, customer traffic and sales would have tumbled far further and faster; and JCP would have attracted far fewer younger shoppers.
The real challenge for JCP is how to persuade customers visiting Sephora to become loyal JCP shoppers who visit and spend in other areas of the store. This strategy is beginning to take shape with the development of more beauty services under the Salon by InStyle banner, some improvements in the womenswear offer, and the activities around the home and appliance category. In our view, it will take time for these initiatives to reach maximum potential.
The area in most desperate need of attention is fashion. Despite the enhancements made to-date, the offer is still not compelling enough to drive sales. Spring collections showed some signs of improvement, but there is much more work to do here if JCP is to turn this into a winning category.
Turning to the bottom line, JCP made an operating loss of $105 million — much worse than last year's Q1 $22 million profit. However, the deterioration was the result of $220 million in restructuring charges from the store closure program.
Given that this is an essential plank of restoring JCP to health, it is a necessary evil. Without these exceptional costs, JCP would have made an operating profit of $115 million. In our view, this points to the fact that Marvin Ellison and his team are gradually improving the operational and financial health of the business. Despite this quarter’s set back, we have confidence that they are taking JCP in the right direction.
It may well be time for JC Penney to anticipate the total collapse of Sears. That said, I would take a run to see if the Kenmore brand is available. Penney could pull this off. This would provide dollars to Eddie Lampert which he needs and would allow Penney to expand its hard lines. Perfect. Contact me for more on this.
Snap off to sluggish start
Growth struggles, including lower-than-expected active user volume, marked Snap’s first quarter as a public company.
The photo-based messaging company, which went public in early March, is growing — albeit slower than expected. For the quarter ended March 31, Snap’s daily active users (DAU) grew to 166 million from 122 million in the first quarter of 2016 — an increase of 36% year-over-year.
However, DAUs only increased 5% quarter-over-quarter, from 158 million in the fourth quarter of 2016. Snap defines DAUs as a registered Snapchat user who opens the app at least once during a defined 24-hour period.
Similarly, average revenue per user (ARPU) was $0.90 in the first quarter, an increase of 181% over the same period last year when these revenues were $0.32. However, ARPU decreased 14% since the fourth quarter of 2016 when the average revenue was $1.05. Snap measures its ARPU as quarterly revenue divided by the average DAUs.
Hosting costs per DAU were $0.60 of the quarter, as compared to $0.52 in for the same period last year, and $0.72 in the fourth quarter of 2016. Meanwhile, capital expenditures were $18.0 million compared to $12.5 million for the same quarter last year, and $20.4 million in the fourth quarter of 2016.
Overall, the company posted $149.6 million in revenue, which missed a Thomson Reuters consensus estimate of $158 million. These factors also impacted the company’s shares, which dropped more than 20% in pre-market trading on May 11.
Despite the rocky start, Snap’s CEO Nick Pinchuk remains positive, say-ing, “The first quarter has convincing confirmation of Snap’s ability to continue its trajectory of positive results, to overcome period-to-period variations from business-to-business to offset macroeconomic head-winds, and to still keep advancing along our runways for both growth and improvement.”
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Nordstrom mixed in Q1
Nordstrom beat the Street on earnings in its first quarter amid strong sales in its off-price division.
Nordstrom said it earned $63 million in the first quarter, compared with $46 million, in the year-ago period. The company earned an adjusted $0.43 a share, beating the $0.27 that analysts were expecting.
Total company net sales increased 2.7% to $3.3 billion. Same-store sales fell 0.8%, worse than expected. Online sales accounted for 24% of total net sales.
By division, sales for the Nordstrom brand, including U.S. and Canadian full-line stores and Nordstrom.com, fell 1.7%, and same-store sales decreased 2.8%.
For the Nordstrom Rack brand, which consists of Nordstrom Rack stores and Nordstromrack.com/HauteLook, net sales rose 8.7%, and comparable sales increased 2.3%.
Across U.S. full-line stores and Nordstrom.com, the top-performing merchandise categories were men's and women's apparel. The West was the top-ranking U.S. region.
Nordstrom said it continued to make progress in executing its customer strategy while maintaining execution around inventory and expenses. Its total customer count increased compared with the first quarter last year.
In May 2016, the retailer expanded its Nordstrom Rewards loyalty program to enable all customers to earn benefits regardless of how they choose to pay. The effort has paid off. Nordstrom said it now has more than 8.6 million active Rewards customers in the U.S. and Canada, up from approximately 5 million a year ago. Sales from Nordstrom Rewards customers represented 47% of first quarter sales, compared with 39% a year ago.
The company reiterated its annual outlook for earnings per diluted share of $2.75 to $3.00, net sales increase of 3%- to 4% and approximately flat comparable sales.
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