It's Going to Be a Long Way Back for J.C. Penney

Inside A JC Penney Co. Store Ahead of Earnings Results
Patrick T. Fallon/Bloomberg/Getty Images
The market is happy with J.C. Penney (JCP) -- for now. Shares of the department store operator initially moved higher after posting better than expected results on Thursday night.

Net sales climbed 5 percent to $2.8 billion, fueled by a 6 percent uptick in comparable store sales. Its quarterly loss narrowed significantly to $172 million, or 56 cents a share. Sales were roughly in line with expectations, but this is the third quarter in a row that J.C. Penney clocked in with a smaller deficit than what Wall Street was forecasting.

It's not the only way that this was an impressive quarter for the retailer. Gross profit margins improved, implying that J.C. Penney didn't have to mark down its merchandise as aggressively as it has through most of the past two years. Inventory levels also clocked in lower than they were during the prior year's fiscal second quarter. You always like to see inventory grow at a pace slower than a retailer's sales. It indicates that a merchant isn't left holding a lot of tired goods. Seeing J.C. Penney's sales inch higher with inventory levels shrinking is encouraging.

However, despite all of the accolades coming out of the refreshing quarterly report, it would be premature to call J.C. Penney a successful turnaround story. It's not there, yet. It's not even close.

A Longer View

After a few rough years that have seen J.C. Penney's stock lose more than three quarters of its value since peaking in early 2012, we're starting to see the chain string together some positive streaks. This is the third quarter in a row that J.C. Penney punched in with positive comparable store sales growth. This is also the third quarter in a row that it posted a narrower loss than analysts were forecasting.

However, the more you dig into how far J.C. Penney has fallen -- and not just its share price -- the more that you will realize how far it has to go to find its way back.

Let's start this story in merrier times. The market cheered in the fall of 2011 when Ron Johnson was tapped as J.C. Penney's new CEO. He was a retailing guru, excelling at "cheap chic" retailer Target (TGT) before arriving at Apple (AAPL) just in time to roll out the insanely popular Apple Store concept.

We now know that he flew to close to the sun in his attempt to make J.C. Penney cool again. Ending the chain's practice of sales and coupons left shoppers feeling betrayed. Plans to offer a "town hall" redo with popular third-party brands grouped into mini-stores within the larger store confused mainstream customers. Nearly everything that Johnson did -- from offering kids' free haircuts on select Sundays to refreshing its classic logo -- backfired.

Johnson was let go last year, paving the way for a former CEO who wasn't all that successful before to come back.

It's All Relative

Sales stabilized last year, and they're moving higher. That's better than the alternative, but let's go back a few years. Comparable store sales slipped 11.9 percent during the same fiscal second quarter in 2013, plunging 21.7 percent in 2012.

Add it all up, and it's not pretty. The market may be cheering that the average store sold 6 percent more than it did a year earlier, but it's still selling 26.9 percent less than it did three years earlier. And -- just to frame this appropriately -- keep in mind that three years ago folks were applauding Johnson's arrival with radical ideas because J.C. Penney was starting to struggle.

The string of three quarters of smaller than expected losses is also a hollow cheering point. It's still red ink. From a financial standpoint isn't it better to come up short and post a profit than to exceed expectations while still delivering a deficit?

Analyst see annual losses continuing for the next few years at J.C. Penney, and that still raises the concept viability concerns that it must overcome. Until this once darling retailer turns profitable -- and until these gradual increases in comparable store sales overcome the previous two years of declines -- it's not fair to say that J.C. Penney has turned things around.

There are baby steps in the right direction in its latest quarter, but it's still going to be a long way back home.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our newsletter services free for 30 days.

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B Minsk-Belarus

I am so glad to here that:) If anybody would like to get JC Penney Gift Card for free, click the link below:


September 10 2014 at 3:46 PM Report abuse rate up rate down Reply

I used to work for JCP while attending college. They were great in those days, changing my work schedule to fit college classes. Oh, they used to pay sales commissions in those days and also demanded that we help customers full time. They really pushed customer service and helping people find their sizes in the clothes they carried. I used to sell suits and dress clothes and made a decent living while putting myself through college. In those days they struggled trying to figure out if they wanted to be Macy's or KMART. One day upscale clothes to compete with Macy's and the next day cheap T-Shirts to compete with KMART. So the lack of focus isn't new for JCP. Oh, I worked there in the 70's to finish college and grad school. Now I don't shop there...its too messy and there is no customer service anywhere in the store.

August 19 2014 at 11:31 AM Report abuse rate up rate down Reply
Kris Nelson

I still like jc Penney. Hope they can rebound.

August 18 2014 at 6:36 PM Report abuse rate up rate down Reply

Seems every time I go into, or back into, my local JCP store the "mature" (please see this as the more than capable) saleswomen have been let go. You need to stop this practice. We baby boomer are noticing and taking our business elsewhere because of this unfair / unkind practice!

August 17 2014 at 10:04 PM Report abuse -1 rate up rate down Reply

The screaming in the JC Penny commercials that was supposed to represent people upset because their items went on sale after they purchased the product was actually shareholders losing all their money on JC Penny's stock and JC Penny himself screaming in the grave at what this so-called no-sale promotion did to his creation. Really JC Penny, when are you going to hire a woman CEO. TJ Maxx - Woman CEO - one of the most profitable retail business around. GM CEO now a woman - sales are way up because they finally have a woman running the company---and the list goes on with women CEOs.

August 17 2014 at 9:58 PM Report abuse +1 rate up rate down Reply
Matt Dougherty

I have been a Jcp customer for fifty yrs.But recently they have lowered My credit card amount and I always paid 50.00 or one hundred above the requested pymt. Also the quality of clothing has lost it's QUALITY

August 17 2014 at 8:05 PM Report abuse rate up rate down Reply

Ice Bucket challenges for Gates and Zuckerberg and the rest of Siliy-Con valley......
Hire only US Citizens for the next 10 Years......

August 17 2014 at 7:16 PM Report abuse -1 rate up rate down Reply

I have made over $40,000 on this stock, i purchased it at the bottom and sold when it his $10.00

August 17 2014 at 4:25 PM Report abuse -3 rate up rate down Reply
Deb Crown

my first credit card was JCP... 40 years ago.. and have been a loyal consumer.. when they got rid of ST.JOHNS Bay.. was thoroughly dissapointed so off to Macy's I went... I have noticed their line is changing again to the better.. ;) .. they need to bring back St. John Bay.. I have made my way back and have been impressed to find clothes again.. ;)

August 17 2014 at 8:30 AM Report abuse rate up rate down Reply

have always shopped Pennys, almost never went to other stores for my needs
seems Pennys clothes and sizes are more for the young<, and the "young" do not shoppe at Pennys
Get some decent more mature'age wise buyers for your store and some of us will be back
Some of us wear sizes larger then 10 and less then plus>>Hard to find good chouces

August 17 2014 at 7:12 AM Report abuse -2 rate up rate down Reply