Context is the key to a happy and fulfilling life. Well, maybe not all that, but it's at least the key to a better understanding of the news. As a perfect example, J.C. Penney (JCPN.Q) has been pushing its rebound story hard recently. Today, CEO Myron Ullman reaffirmed the official position that the business was on its way to comparable sales growth in the third quarter. The stock subsequently jumped 8%.
Source: J.C. Penney.
The optimism is warranted -- to an extent. The fact that J.C. Penney is expecting comparable store sales to start rising is almost a no-brainer at this point. The last time third-quarter earnings were as low as they were in 2012 was back in the 1980s. If that wasn't the low point, then J.C. Penney simply wasn't going to survive.
J.C. Penney's return to growth?
The company has said that comparable store sales are on an "improving trend," but not that they're fixed. In today's comments at a Women's Wear Daily conference, Ullman was noted as saying that the business would see comparable store sales increase in the third quarter, but it's unlikely that the increase will be for the third quarter.
Comparable store sales fell 11.9% in the second quarter and 4% in September. The fall in September was smaller than the August drop, though, pointing to improvement in the business. Given that he spoke today, I'd guess Ullman is looking at October sales and seeing a slight increase from 2012 -- aka the weakest third quarter that the business has had since the 1980s.
Is it worth it?
Getting back to context, I'm going to make a bold -- for me -- claim. The 8% jump today is probably smaller than is deserved for this kind of news. If you think J.C. Penney is worth something -- and that's debatable -- the company is clearly worth more in a growing position than it was when the wheels were falling off. The stock is down more than 60% year to date, but the business is arguably in a better position now than it was in January.
The market still expects the business to lose money in the third quarter, and I expect the same for the fourth and probably most of next year, too. But the department store chain is still in a relatively strong cash position that's made up of stock proceeds, lending lines, and general cash on hand. If Ullman has actually found the bottom, then this might be the real beginning of a turnaround.
Now, before we all go out and buy every J.C. Penney share we can get our grubby little hands on, let's keep that context in mind once more. This is the first hint of a real turnaround, not a sustained period of growth. The business is still losing money, it still owes a lot of people a lot of cash, and it still has lot of real estate locked up as collateral for loans. While it's looking better, it's by no means looking good.
Before I got anywhere near this lifeboat -- let's face the fact that the ship has sunk -- I'd want to see not only some growth, but some shrinking. J.C. Penney is bigger than it needs to be, and once sales hit some sustained growth I want to see it shed the fat. Today's jump might be smaller than the growth demands, but maybe it's right-sized after all, given the hurdles that Ullman and company still need to clear. For now, I'm happy to be cautiously impressed -- and that's a big step for J.C. Penney.
