On Wednesday, shares of J.C. Penney Company (NYSE:JCP) fell more than 8% following its December sales update. The company, which has been reporting monthly sales figures since at least 2004, stunned investors when it failed to release any results for the month. In its place, management announced that it was "pleased" with its performance over the holidays and that the business is "showing continued progress in its turnaround efforts". While it is possible that the picture may not be so grim, investors fear the worse by this period of silence. However, is it possible that right now, when Mr. Market is scared of the company, the Foolish investor might have found a wonderful bargain, or is J.C. Penney truly a sinking ship?
Times have been hard for J.C. Penney
The past few years haven't been kind to J.C. Penney. After replacing Mike Ullman, the company's CEO, with Ron Johnson, a former Apple executive, in 2011, sales of the multi-billion dollar retailer fell drastically. Between the company's 2012 and 2013 fiscal years, sales dropped 24.8% from $17.3 billion to $13 billion, the largest decline in sales the company ever experienced. The falloff in sales came about after management decided to stop offering coupons to consumers and, instead, focus on providing everyday low prices. This move by management made consumers feel disenfranchised and ultimately led to an exodus in business.
Benefiting from this outflow in business, rival Macy's (NYSE:M) saw its sales rise 4.9% from $26.4 billion to $27.7 billion, while net income rose an impressive 6.3% from $1.26 billion to $1.34 billion. This rise in revenue and profits came in spite of other retailers like Abercrombie & Fitch, Aeropostale, and Kohl's seeing their profitability falter.
In an effort to improve its business, the company announced a deal with Martha Stewart Living Omnimedia to develop a store-within-a-store business model. Initially, this partnership looked promising, as it would bring an iconic brand into the company's stores and potentially boost sales. However, Macy's filed suit against both J.C. Penney and Martha Stewart, alleging that the deal infringed on its contractual rights to be the sole provider of products that fell under the Martha Stewart Collection brand. After several months in court, Macy's and Martha Stewart arrived at an undisclosed settlement, but the suit between it and J.C. Penney is still in progress.
But not everything is bad!
In light of these negative developments, there has been some upside for J.C. Penney and its shareholders. After more than a year in power, Johnson was removed from his position in the company and replaced by Ullman. To turn business around, the company completed a partial reversion to its former self by offering up coupons again.
But, realizing the value that could be had from some of Johnson's innovations, the company decided not to axe its store-within-a-store concept and to, instead, grow it substantially. Perhaps the most important development announced in this department was the company's partnership with Disney to create a store-within-a-store setup inside J.C. Penney locations.
While J.C. Penney hasn't provided any financial results for its store-within-a-store business model, early evidence from Macy's suggests that the concept is promising. During its most recent quarterly report, Macy's announced that while its comparable store sales rose 3.5% compared to the same period a year ago, its sales growth was much stronger if you considered its store-within-a-store setups.
For the quarter, the company saw comparable store sales rise 4.6% when you include these operations. If a similar trend is taking place at J.C. Penney, then it's likely that a successful turnaround of the retailer will involve a heavy reliance on partnerships similar to the one it struck with Disney.
So far, evidence of a turnaround at J.C. Penney has been scarce. In fact, the only real signs that its situation has been improving were collected from the company's monthly sales figures. For instance, in the month of October, management announced that comparable store sales rose 0.9% when stacked up against the previous October. November's numbers came in even stronger, with comparable store sales rising 10.1%. These metrics, combined with big-name investors like David Tepper and George Soros coming into the fray have pointed in the direction of a brighter future.
It is for these very reasons that investors became optimistic about the company but now all of that seems to have gone out the window with J.C. Penney's announcement. Instead of saying that sales rose or fell by X%, the company merely stated that it found its results promising and that it's sticking to the guidance it provided in its third quarter earnings release. Had management provided substantial estimates during its third quarter earnings release, investors might not be so concerned. However, this simply isn't the case.
Instead of providing firm guidance on sales and earnings, the company stated that, "comparable store sales and gross margin are expected to improve sequentially and year over year" and that, "SG&A expenses are expected to be below last year's levels". In all fairness, management did provide estimates on depreciation, capital expenditures and interest expense, but never provided enough information for analysts to figure out what its December sales release actually means.
In theory, it could mean that comparable store sales fell but not so much that it would completely erase the gains from October and November, or it could mean that sales figures were extraordinary. But, if the latter were the case, then management could be expected to make a big (and positive) deal about it. Rather, the period of silence that J.C. Penney seems to have entered into likely implies that its situation is far worse than originally thought.
Daniel Jones has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.