J.C. Penney's Earnings Were Strong, but It's Not Out Of the Woods Yet

J.C. Penney reported strong earnings for the fourth quarter of its 2013 fiscal year. After this strong performance, the company might be an attractive prospect, but it still has room to go before it can successfully turn around.

Feb 28, 2014 at 2:10PM

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Source: Wikimedia Commons.

Well folks, here's the news we've been waiting for. After announcing earnings for the fourth quarter of its 2013 fiscal year, J.C. Penney (NYSE:JCP) might live. In response to a better-than-expected quarter, shares of the struggling retailer rose nearly 14% in aftermarket trading; that's on top of the 6% gain the company's shares chalked up leading up to the release. Given this recent development, is it possible that J.C. Penney offers investors an attractive opportunity, or is this just one last spike before it heads to zero?

Quarterly results were mixed but strong
For the quarter, J.C. Penney reported revenue of $3.78 billion. This represents a 2.6% drop compared to the $3.88 billion the company reported in the year-ago quarter, and narrowly missed analyst estimates of $3.86 billion. Although this may appear bad, when you remove the effect from the extra week of operations the retailer enjoyed in 2012, revenue rose 1.6%.

In the release, management highlighted that the company's comparable-store sales increased 2% compared to the same quarter of 2012. Although this is less of an improvement than the 2.3% rise in comparable-store sales reported by Macy's (NYSE:M) or the 2.6% increase reported by Nordstrom (NYSE:JWN), it's in line with the 2% increase reported by Dillard's (NYSE:DDS).

Looking at profitability, J.C. Penney's results were even better. For the quarter, the company saw its earnings per share come in at $0.11. This is far better than the $2.51 loss per share the company reported in the fourth quarter last year and a huge surprise compared to the $0.82 loss that Mr. Market anticipated.

Although the business benefited from an 86% reduction in its pension charge, its improved bottom line was also attributable to lower operating costs in relation to sales. For the quarter, J.C. Penney saw its cost of goods sold reach 71.6% of sales compared to 76.2% of sales a year earlier. Equally strong was the business' selling, general, and administrative expenses, which fell from 31.1% of sales to 26.5%.

But what does this mean for J.C. Penney down the road?
Right now, J.C. Penney's shareholders are celebrating the company's strong quarter, but it's important not to let the rising share price cloud your judgment. Even after posting these strong results for the quarter, the company's sales for its 2013 fiscal year came in at $11.9 billion, almost 9% lower than the $13 billion reported for 2012.

For the most part, this decline in sales was due to a 7.4% drop in comparable-store sales. Admittedly, this is far better than the 25.2% drop in comparable-store sales the business was hit by between 2011 and 2012, but it's not what most investors should consider amazing. To make matters worse, the drop in sales for the year led to a full-year net loss of $1.4 billion, drastically worse than the $985 million loss the company posted for 2012.

In contrast, rivals like Macy's, Dillard's, and Nordstrom performed far better for the year. Take Nordstrom. Over the past year, the company reported that its revenue rose more than 3%, from $12.1 billion to $12.5 billion. After removing the $162 million the business reported in sales last year for its 53rd week, its revenue would have grown nearly 5%. Unfortunately, Nordstrom was unable to convert this rise in sales into higher profits. For the year, the business reported net income of $734 million, a 0.1% reduction from 2012 that can be chalked up to higher operating expenses.

Dillard's didn't do quite as well, but its performance was stronger than J.C. Penney's by a long shot. For the year, the company reported a 0.9% decline in revenue. After adjusting for its extra week of sales in 2012, though, the business' revenue actually rose 1%. In light of the company's lower revenue and because of a slight rise in costs, Dillard's saw its net income drop nearly 4%, from $336 million to $323.7 million.

During the 2013 fiscal year, the only great performer was Macy's. Despite the fact that the company's revenue rose only 0.9% (excluding its extra week from 2012), from $27.7 billion to $27.9 billion, the business saw its bottom line improve considerably. Compared to a year earlier, Macy's net income rose more than 11%, from $1.3 billion to approximately $1.5 billion.

Foolish takeaway
Based on J.C. Penney's quarterly earnings, shareholders have much to be thankful for and a lot to look forward to. In the long run, it looks as though J.C. Penney may turn around, but it would be foolhardy to exhale yet. Rather, investors in the company should continue to watch carefully, as any misstep by management could put the business on the road to bankruptcy.

In the meantime, those who believe the troubled retailer to be too risky may want to consider an investment in one of its peers. Macy's looks particularly appealing at first glance, but as a Foolish investor, you should analyze the company in greater detail before you decide to jump in.

Could J.C. Penney be the best of the best?
The Motley Fool has identified one company as the top stock to hold for 2014. After rising on such strong earnings, is J.C. Penney that company or is there something more interesting out there? You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Daniel Jones has no position in any stocks mentioned. The Motley Fool owns shares of Dillard's. 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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