Though guidance was mediocre, in our view, Kohl’s raised its quarterly dividend 9% to $0.35 per share—representing an annual yield of 3% at current levels. Free cash flow was still positive at $480 million, but that was a sharp decrease from free cash flow of $1.2 billion in 2011. It’s quite possible that 2012 was an aberration, but management’s poor guidance leads us to believe 2013 will also be fairly weak. We don’t think shares of Kohl’s look expensive, so we’ll continue to monitor the situation to see if it can improve its brand image and regain traction with its core consumer base. Valuentum places a strong emphasis on valuation, but recent results suggest fundamentals could be declining.
The Ugly: J.C. Penney Company, Inc. (NYSE: JCP)
J.C. Penney posted one of the worst quarters in department-store history. That statement may sound bold, but J.C. Penney experienced a 31.7% decline in same-store sales, while total sales fell 28.4% year-over-year to $3.4 billion—even though the firm benefited from an extra selling week. The company posted a loss of $1.95 per share when adjusting for extraordinary expenses, which was even worse than the company’s loss of $0.41 per share in 2011.
There were virtually no positives in the fourth quarter—even online sales failed to grow, falling 34% year-over-year to $315 million. We thought gross margins were bad at Kohl’s, but a 640 basis-point year-over-year decline at J.C. Penney Company, Inc. (NYSE:JCP) left the firm with an abysmal gross margin of 23.8%. SG&A actually declined 10% on an absolute basis, but it didn’t really matter because sales were down so sharply.
Controversial CEO Ron Johnson ended his first year with an adjusted loss of $3.49 per share, with sales down 24.8% and same-store sales down 25.2%. Johnson’s “overnight” transformation hasn’t worked out as planned, and the firm has done a terrific job of alienating its highly promotional customer base. We believe Johnson overestimated the ability of his consumer base to make the leap to everyday low prices when they had been fed coupons for years and years (and years).
Though many are calling for Johnson’s head, we’re willing to give him some additional time to complete the transformation. According to the company, remodeled parts of the store are doing well, but the big problem is most of stores haven’t been fully remodeled. The company burned through $577 million in total cash during 2012, and its plan to fund capital expenditures via operating cash flow doesn’t look possible. Liquidity could become a real problem in the back half of 2013.
Though his first year was abysmal, J.C. Penney Company, Inc. (NYSE:JCP) was already skirting toward irrelevance before he took the reins, so we believe he was right in his assessment that the company had to transform or die. At this time, it appears he has simply expedited J.C. Penney’s death, but there’s a chance that his strategy works out in late 2013/2014. Nevertheless, we think J.C. Penney’s outlook is highly uncertain, and we’re staying away from shares.
The article The Good, the Bad, and the Ugly: Macy’s, Kohl’s and J.C. Penney originally appeared on Fool.com and is written by RJ Towner.
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