J.C. Penney Finally Shows Growth -- Should Investors Take a Look?

J.C. Penney grew sales in the fourth quarter, but is it enough?

Feb 4, 2014 at 10:15AM

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Following a challenging day for U.S. stocks on Monday, the major indexes opened higher this morning, with the benchmark S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES:^DJI) up 0.62% and 0.37%, respectively, at 10:15 a.m. EST. Across the Pacific, Japan's Nikkei 225 index dropped 4.2% today, sliding firmly into correction territory. Japan was a standout equity market in 2013, as the Nikkei registered a stunning 57% increase (which included a correction along the way); in that context, it would hardly be surprising if Japanese stocks were overextended and this correction warranted. The S&P 500 may have risen a more modest 30% last year, but I think the same observation broadly applies -- investors should be prepared for the possibility of a correction (psychologically, that is -- a 10% decline in stock prices does not necessitate an overhaul of one's portfolio).

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Shares of struggling retailer J.C. Penney (NYSE:JCP) are underperforming this morning, down 0.88% at 10:15 a.m. EST, as the department store chain announced preliminary sales data for the key holiday period and the fourth quarter. For the latter, same-store sales rose 2% -- the first instance of quarterly growth since the second quarter of 2011. On the face of it, that is a much better performance than some its larger competitors:

Last week, Wal-Mart warned that it expects fourth-quarter results to come in at the bottom end of its guidance range, if not below. The company had previously indicated that sales at its domestic stores would be flat (excluding Sam's Club, which were expected to produce flat to 2% growth). Chief Financial Officer Charles Holley said that sales at both stores would likely fail to meet that guidance.

Likewise, in early January, Target significantly lowered the guidance range for its fourth-quarter results. Where comparable-store sales were previously expected to be flat, the company is now guiding to a 2.5% decline. However, that revision is largely due to a company-specific event -- the massive breach of customer payment card data Target announced on Dec. 19. Until that point, fourth-quarter sales had been stronger than expected; after the announcement, sales were "meaningfully weaker-than-expected," Target acknowledged.

Is J.C. Penney's announcement enough to motivate investors to take another look at the shares? I think most individual investors ought to avoid the stock. Turnarounds are very difficult to pull off. Turnarounds in the brutally competitive retail sector are even more challenging, and the results can't always be maintained -- at which point, another turnaround becomes necessary. J.C. Penney belongs in the "too hard" pile – investors would be better off focusing their limited time and resources on outstanding, durable businesses.

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Alex Dumortier, CFA has no position in any stocks mentioned; you can follow him on Twitter @longrunreturns. 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.

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