Not even sales were enough to bring in customers to Gap brand stores. Photo Flickr via Mike Mozart.
Gap (NYSE GPS ) recently cut its full year earnings guidance due to falling sales and slack demand. Because it's the latest clothing retailer to fall short of analyst expectations some worry it's a warning sign the turnaround at J.C. Penney (NYSE JCP ) is faltering.
Comparable store sales at Gap brand stores fell 5% in the third quarter while they were flat at Banana Republic and up 1% at Old Navy. Third quarter revenues at the clothing retailer were $3.97 billion down from the $3.98 billion it generated a year ago. Profits were higher though with net income rising to $351 million or $0.80 per share compared to $337 million or $0.72 per share a year ago. Wall Street had expected profits of $0.79 per share on revenues of $4.04 billion.
Analysts say tight fisted consumers being careful with their discretionary spending money are to blame. The spending habits are causing retailers to slash prices to attract customers but that will only pinch profit margins.
J.C. Penney is in the midst of a turnaround that was gaining traction until this past quarter as its sales also came in lower than a year ago. But losses narrowed sharply year over year and where traffic was still negative the metric continued its sequential improvement.
Both Macy's (NYSE M ) and Kohl's (NYSE KSS ) reported similar troubles. They each saw their comps decline in the period. At least same store sales were flat at J.C. Penney.
As a recent investor in J.C. Penney I'm not worried yet about the pause in its recovery. Gap is the biggest apparel focused retailer. Whatever slowdown there is in consumer spending it will feel it more acutely than others.
And while some on Wall Street say consumer spending is falling Action Economics says it's back on the rise. As reported by USA TODAY the market analysts there say retail sales rose 0.3% in October up from September when they experienced a similar percentage rate decline. According to that report IHS Global Insight agrees saying the Christmas season could be particularly strong because discretionary spending reversed course dramatically.
Retailers like J.C. Penney also should benefit from the sharp decline in gas prices as it should give people more money to spend. AAA says gasoline prices average $2.81 in the U.S. 14% lower than last year and the best they've been since 2009. The average price of gas has fallen every day for 60 straight days.
That's going to put more money in the pockets of shoppers. Coming as it does before Christmas it's more likely they'll spend that money instead of save it however Fortune magazine worries it will go to pay for higher prices at the grocery store.
Still J.C. Penney's performance was better than its rivals. It is still in a financially difficult place but destination is better than location.
And J.C. Penney is heading to a better place. In the most recent quarter
Clearance merchandise is down 30% from last year. Gross margins up 710 basis points to 36.5% of sales. Same store sales were flat. Full year guidance for comps and gross margins was maintained while rivals cut theirs. Free cash flow will be positive by year's end. Liquidity will be a healthy $2.1 billion.And Gap has issues unique to itself including a CEO transition.
Of course J.C. Penney just announced its own new CEO but with a mandate to keep the department store chain on a steady course while Gap's CEO is to remake the clothing store digitally Penney may have an easier time of it.
Having recovered its balance after nearly going under the department store chain is now sailing on calmer seas. There are still risks that could sink its recovery but investors shouldn't read anything into the tea leaves of Gap's earnings report as a warning sign for J.C. Penney.
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