J.C. Penney's (NYSE: JCP) second-quarter earnings report raised a lot of questions about whether the company can survive in the long-term. The retailer did see a 0.3% increase in comparable store sales, but it also saw its adjusted net loss jump to $120 million ($0.38 per share) from $23 million ($0.07 per share) in the year-ago period.
The company also reported that its cost of goods sold rose to 66.3% of sales, up from 64.7% in Q2 2017. That's largely due to the company offering "slow-moving seasonal inventory" at lower prices "due to lower than planned sales," according to the company's earnings release.
Management, which is being led by an "office of the CEO" since former chief Marvin Ellison left the company, tried to explain its issues in the earnings release and on a call with investors. The leadership group -- consisting of Chief Financial Officer Jeff Davis, Chief Digital Officer Therace Risch, and Executive Vice President of Supply Chain Mike Robbins -- remained upbeat, but admitted that some changes are needed.
On the positive side, J.C. Penney did report a slight increase in same-store sales. Image source: J.C. Penney.
Inventory was a problem
J.C. Penney has been struggling with what it should stock for a long time. It has made major changes to its product mix -- specifically in apparel -- but it still has more work to do. Davis tried to explain the problem in his remarks in the earnings release. He stated:
This quarter we adjusted our approach to inventory management from 'buying to store capacity' to 'buying and chasing' into demonstrated sales trends. Inventory receipts continued to outpace total sales performance this quarter due to prior purchase commitments. As such, we took necessary actions to markdown and clear excessive inventory positions across many of our categories, which encompasses more than just seasonal product or fashion misses.
The CFO acknowledged that further clearance activity would be needed to "right-size" inventory. As a result, J.C. Penney reduced its guidance for 2018. It now projects that full-year same-store sales will be flat, compared to its original forecast of 0% to 2% growth. It also expects a full-year adjusted loss of $0.80 to $1.00 per share, far worse than its previous guidance for earnings between a $0.07 per share loss and a $0.13 per share gain.
The company has cash available
Trent Kruse, J.C. Penney's head of investor relations, spoke during the earnings call to provide details on the company's balance sheet, capital structure, and liquidity position. He noted that J.C. Penney had ended the quarter with $177 million in outstanding borrowings on its credit facility, a number that was actually down $174 million from the end of the previous quarter. He continued: