For those that might be elated at the fact that J.C. Penney (JCP) reported profits in the fourth quarter, they need to put it in perspective. The fourth quarter is the big holiday shopping season. JCP profited last year in the fourth as well. When you compare those profits to Q418, JCP's performance actually cratered. This premarket spike might be the perfect opportunity for the shorts. I certainly don't see long term upside.
Total revenues decreased 8.4% year over year to $3.78 billion. A 9.5% fallout in net sales was slightly offset by a 44% increase in credit income. On a shifted basis, comparable store sales declined 4%. This simply isn't the type of outcome that drives stock prices. The company failed to manage its expenses at a level necessary to counter the revenue declines, and operating income suffered a 47.7% decrease to $127 million. Pretax income fell 59.6% to $63 million.
JCP has relied a lot on taxes, lower taxes to be precise. In the fourth quarter of 2017, a large portion of JCP's net income was thanks to an $86 million tax benefit. This year, a tax benefit once again played a role in their earnings. JCP had a $12 million benefit added to their income, which helped bring net income to $75 million. That's a 69% decrease year over year. Diluted earnings per share were $0.24. Those earnings are a 68.8% decrease from 2017.
So while J.C. Penney's earnings were better than expected, there's really nothing here to celebrate. JCP made money in Q417, and then proceeded to lose money for the three straight quarters of 2018 after it. I'm guessing 2019 won't be any different. We saw profits from the holiday season, and now we're looking at three quarters of the doldrums. The company plans to close another 18 stores this year, and I wonder how they'll create the revenue streams and income necessary to cover their debts if they keep shrinking. The retailer has more than $3.7 billion in long term debt. How can they innovate or turn things around while they service that debt? They have $333 million in cash/equivalents, and $109 million in cash alone. Considering the company lost $255 million for the full year 2018, I don't think their capital constraints leave much room for maneuvers. Since they made far less in Q418 than Q417, the situation might be even messier.
In terms of guidance for 2019, the only real information provided by the company is an expectation of positive free cash flow in 2019. That's pretty vague. I don't think the retailer has any idea how to fix this. They can't get their finances in order while also attempting to fix the business. It creates a problem that we're too far along to really fix. The company will either take on further liabilities to invest in an attempt at future growth, or it will keep cutting costs to attempt to show profits. Either way, nothing done thus far has improved the sales situation. Stores are closing, cash is decreasing, and total equity is suffering. How does this seem like a good investment?
The answer is it's not. The big jump in the stock today makes it clear that this one is controlled by traders. It's getting traded off of news events both up and down. I think the only real play for JCP outside of that is a long term short. I'd love it if this stock would keep running up to around $2 because it would make 2021 put options cheap. Based on the consistent comp sales declines, and general revenue fallout, I think things only end one way for J.C. Penney. To get sucked in off of the fourth quarter's "surprise" would be a silly mistake.