J.C. Penney Still Has a Lot to Prove

J.C. Penney (NYSE: JCP  ) may be posting positive comps again, but it's too soon to read too much into the busier registers. 

The struggling department store chain turned heads after yesterday's market close by announcing that comps rose an impressive 10.1% in November. This follows surprisingly positive comps in October. Comparable-store sales had been negative since the end of 2011.

However, it would be premature for J.C. Penney bulls to gloat here. This is only a small step for the retailer, and it may not even be a step in the right direction.

As for the "small step" part, keep in mind that comps declined 31.7% during last year's holiday quarter. We didn't get a monthly breakdown at the time, but it's a safe bet that November, December, and January were brutal a year ago. J.C. Penney isn't anywhere near where it was two years ago, and it's not as if it was in such a good place then. 

However, the real reason that we can't read too much into this positive number is that we don't know if J.C. Penney is sacrificing margins for the sake of sales. We saw that a positive October came partly on the strength of promotional pricing and clearing out unsold merchandise at desperate pricing. How do we know that this isn't happening now?

In fact, we already know that J.C. Penney started off November with $3.75 billion in merchandise inventory. A year earlier it had just $3.36 billion. There will clearly be a greater incentive to clear out wares, and lower gross margins can more than offset any top-line gains. Gross margins slipped in the third quarter, and this is the fourth year in a row that gross margins have declined during the period. It's not the kind of momentum you want heading into the fourth quarter.

Analysts are already braced for a loss during the seasonally potent quarter, and they don't see J.C. Penney turning a profit anytime soon. The market may be cheering the double-digit uptick in comps, but it's an incomplete story. Save your applause for when J.C. Penney has actually earned it.

It's not J.C. Penney changing the face of retail
To learn about two retailers with especially good prospects, take a look at The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform and how they're planning to ride the waves of retail's changing tide. You can access it by clicking here.


Read/Post Comments (0) | 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.

Be the first one to comment on this article.

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: 2751580, ~/Articles/ArticleHandler.aspx, 12/17/2014 3:02:01 PM

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...


Advertisement