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.