2 Improvements J.C. Penney Sees for 2014

J.C. Penney shares flew high on a positive fourth-quarter report. But why is the struggling retailer optimistic for the year to come?

Mar 4, 2014 at 4:05PM

J.C. Penney (NYSE:JCP) shares leapt 14% aftermarket last Wednesday following its fourth-quarter report. The company reported quarterly comparable-store sales growth that lagged only slightly behind the performances of Macy's (NYSE:M) and Nordstrom (NYSE:JWN) and soared past Sears Holdings (NASDAQ:SHLD). J.C. Penney also showed signs of managing inventory turnover and issued some of the best yearly guidance the company has posted in years. But what's behind J.C. Penney's optimism for 2014?   

During the earnings call, returned CEO Myron (Mike) Ullman outlined the company's three-phase turnaround plan. J.C. Penney has already moved through the stabilization and rebuilding phases. And now comes the time for the progressive "go-forward" phase that Ullman hopes will carry the company toward long-term growth.

What improvements does J.C. Penney predict will occur in 2014?  

Jc Penney Store

Source: J.C. Penney.

Improved gross margin through careful brand selection 
Mike Ullman's return included the need to immediately tackle the inventory issues Ron Johnson's turnaround attempt created. Johnson had done away with some popular private brands to focus on higher-profile brands that often didn't sell as well. Ullman's restocking process involved discontinuing underperforming brands including William Rast, JCP Everyday, and JCP Men's while simultaneously working to increase -- or reintroduce -- brands that have resonated with customers: St. John's Bay, Liz Claiborne, and Arizona, to name a few.    

Gross margin took a hit last year during the process of replacing the old with the new, which required a hefty amount of markdowns and an inventory turnover problem. But the fourth quarter was the first to begin showing that this process might've neared completion. 

The full-year growth margin for 2013 was 29.4% of sales compared to 31.3% in 2012. But the fourth quarter showed improvement at 28.4% of sales compared to 23.8% in the prior year's quarter. 

JCP Gross Profit Margin (Quarterly) Chart

J.C. Penney gross profit margin (quarterly) data by YCharts.

J.C. Penney still has some work ahead to reach the margins of Macy's and Nordstrom. But the company has at least recovered from the days it was dipping down to Sears' levels. And J.C. Penney expects to show another margin improvement in the first quarter -- presumably as the company becomes less reliant on markdowns related to inventory overhang. 

Online sales reporting double-digit percentage growth 
An often overlooked sign of J.C. Penney's slow recovery is the sales performance for the chain's website. JCP.com sales grew 26% in the fourth quarter to $381 million, which was an increase of nearly 6% of the prior year's quarter, which had shown a drop of 34% year over year.

What drove the growth? J.C. Penney has focused on unifying the store and online experiences, which included better stocking for both shopping experiences. The website also received a visual overhaul that made online shopping more user-friendly. And the complete overhaul of the home segment, which included Ron Johnson changes that customers particularly disliked, has also helped online sales. Home was traditionally one of the strongest segment sellers through the website, since it's easier to display a number of larger items online than on the showroom floor.

Foolish final thoughts
The fourth-quarter results reflect a company that's moved through a transition but has yet to prove long-term results. J.C. Penney investors have reason to celebrate that Mike Ullman's at least undone the damage from Ron Johnson's strategies. But remember that Johnson was brought on because J.C. Penney wasn't performing as well as its peers. J.C. Penney's future seems safer than that of Sears, but the company still needs to prove its ability to keep its head above the choppy retail waters.

Want a stock with a clearer future?
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. 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.

Brandy Betz 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information