J.C. Penney Soars on Turnaround Hopes, but the Dow's Waiting Game Continues

Shares of the beleaguered retailer jumped more than 20% this morning, but the impact on the overall stock market was minimal.

Feb 27, 2014 at 11:00AM

Throughout 2014, the Dow Jones Industrial Average (DJINDICES:^DJI) has been looking for some sort of catalyst to regain all of its early losses and start building on the impressive gains it posted over the past five years. Yet even news of a potential recovery for J.C. Penney (NYSE:JCP) wasn't enough to lift the Dow very far today, with the index up just nine points as of 11 a.m. EST. Moreover, morning drops by blue-chip stocks Wal-Mart (NYSE:WMT) and Home Depot (NYSE:HD) suggested that the J.C. Penney effect was company-specific and unlikely to spur a broader rally in the Dow Jones Industrials or the stock market overall.

J.C. Penney's 22% gain came on the heels of its earnings report last night, in which CEO Myron Ullman tried to convince investors that the retailer has finally hit bottom. The company had already announced a same-store sales gain of 2%, which although positive was particularly weak given the huge plunge in year-ago comps. But investors were apparently happier with the company's 2014 guidance, with Penney saying it expects middle single-digit comps for 2014, with greater liquidity and substantially higher gross margin pointing toward a potential turnaround.

Yet there are reasons not to trust the retailer's bounce as being anything more than a sigh of relief rather than a sign of true confidence. Given how far investors had already beaten J.C. Penney's stock down, today's jump barely puts a dent in its losses in recent years.

Perhaps more tellingly, modest declines in Dow Industrials members Home Depot and Wal-Mart reflect the ongoing challenges that the retail industry as a whole faces. Concerns about minimum-wage increases could hit the two retailers' labor costs, potentially squeezing margins and forcing the retailers to decide whether to pass on higher costs to customers or let shareholders suffer the hit to profits. Moreover, Wal-Mart faces stronger online competition, as well as deep-discount competitors and its traditional department-store rivals, while Home Depot is faced with a resurgent Lowe's and smaller competitors trying to carve niches out of Home Depot's broader-based business.

Penney has largely been focusing on survival, so dealing with labor costs and its own competitive pressures hasn't been front and center in its strategic thinking. Eventually, Penney will have to address those issues in order to avoid the same troubles that initially put the retailer in the situation it's in today.

J.C. Penney may have heartened long-suffering shareholders today. But we'll need to see broader-based signs of strength in the economy as a whole before investors can expect the first record high for the Dow of 2014.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Home Depot. 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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