I'm Not Impressed, J.C. Penney

Shares of J.C. Penney (NYSE: JCP  ) opened 9% higher today after the company posted well-received financial results. 

It's hard to get too excited here. Sales still fell 5%, to $2.78 billion, weighed down by a 4.8% slide in comps. That does include the positive turn of 0.9% in October, but we knew about that two weeks ago. In the end, there's no point in celebrating a negative quarter when it came after a 26.1% plunge in same-store sales a year earlier during Ron Johnson's ill-advised reign. In other words, the average J.C. Penney department store is selling nearly 30% less than it did two years ago. Oh... and actually, the real store-level performance is even worse than that, because J.C. Penney includes the improving online sales into its comps. 

Bulls high-fiving one another today may want to rethink the celebration.

"What good is increasing sales if it comes at the expense of contracting margins?" I asked two weeks ago, warning that we should wait for this morning's performance before truly celebrating the positive same-store sales in October. Well, the news wasn't pretty. Gross margins slipped from 32.5% last year, to 29.5% this time around. J.C. Penney argues that gross margins were hurt, in part, by the chain's "transition back to a promotional pricing strategy," but that's not how longtime investors remember the retailer's promotions playing out. Gross margins have been on a terrible slide for years.

Q3 Gross Margins
2009 40.6%
2010 39%
2011 37.4%
2012 32.5%
2013 29.5%

Source: J.C. Penney earnings releases.

J.C. Penney points out that the gross margin erosion is also happening as it clears out inventory. During its earnings call, it even pointed out that it had to sell some items below cost to clear out Johnson's lingering mistakes. That's fair, even if it means, ironically, that J.C. Penney is trying to get back to the point where it was before it brought in Johnson because it wasn't happy with its performance. However, with gross margins crashing, and the company conceding that it's offering ridiculous deals to clear out inventory, are you sure that we should be applauding those sales? What will J.C. Penney sell when it runs out of stuff to sell below cost?

That was a low blow, I'll concede, but let's get back to inventory. J.C. Penney points to its still-bloated inventory levels -- up $592 million sequentially -- as normal, because it includes its "typical seasonal build" in inventory as it readies for this shortened holiday shopping season. OK... but merchandise inventory is still $385 million higher than it was a year ago when it was in that same mode. J.C. Penney points out that it expects to bring inventory levels down to $2.85 billion at the end of the holiday quarter; but that's also well above the $2.34 billion it had at the end of the prior year's holiday quarter. 

"The turnaround of J.C. Penney is starting to take hold," CEO Mike Ullman proclaimed during this morning's earnings call. 

It's hard to turn things around when you're still falling.

Another retailer is making the cut in this list of dividend-paying winners
Dividend stocks can make you rich. It's as simple as that. While they don't garner the notoriety of high-flying growth stocks, they're also less likely to crash and burn. And over the long term, the compounding effect of the quarterly payouts, as well as their growth, adds up faster than most investors imagine. With this in mind, our analysts sat down to identify the absolute best of the best when it comes to rock-solid dividend stocks, drawing up a list in this free report of nine that fit the bill. To discover the identities of these companies before the rest of the market catches on, you can download this valuable free report by simply clicking here now.

Read/Post Comments (1) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 01, 2013, at 3:36 PM, girl4266 wrote:

    Keep in mind JCP closed in 2011 with $2.91m of inventory. Of course they didn't make money that year either but their loses were substantially less than 2012. I think they may be able to swing it if they come in with 2.83 inventory closing 2013. I'm actually praying they will be closing at 2.5 in inventory. People need to start shopping there again. They are a quality clothing store that I trust. If I only have Kohls and Macy's left to shop at I'm going to be very disappointed.

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2736469, ~/Articles/ArticleHandler.aspx, 9/29/2016 1:22:02 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 3 hours ago Sponsored by:
DOW 18,339.24 110.94 0.61%
S&P 500 2,171.37 11.44 0.53%
NASD 5,318.55 12.84 0.24%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/28/2016 4:01 PM
JCP $9.55 Down +0.00 +0.00%
J.C. Penney CAPS Rating: *