Take J.C. Penney’s “Turnaround” With a Large Grain of Salt

J.C. Penney’s turnaround isn’t as grand as you may have thought.

Mar 11, 2014 at 10:14PM

J C Penney Office
Source:  glassdoor.com

When I first saw the headline announcing that J.C. Penney (NYSE:JCP) had turned a profit for the fourth quarter, I was very happy to hear the news. Who doesn't love to root for the underdog, especially a corporate icon such as J.C. Penney that many of us grew up with and adored? Unfortunately, not only did that "profit" come from a one-time tax benefit, but there are a number of other factors suggesting that the turnaround is questionable.

The rebound
On Feb. 26, J.C. Penney reported its fourth-quarter results. Net sales slipped 2.6% to approximately $3.8 billion. jcp.com sales leapt 26.3% to $381 million. Same-store sales inched up 2%. Holiday sales bumped up 3.1%. It was quite an improvement on the face of it.

The most exciting parts of the report were the optimistic commentary and outlook. For the current quarter, same-store sales are expected to be up between 3% and 5%. For the full year, J.C. Penney expects even better results, with mid-single digits in same-store sales growth.

Even better and most vital to J.C. Penney's survival was the $2 billion in liquidity it ended the year with. This was far greater than the $1.3 billion to $1.5 billion it had been predicting back in August and September.

Where it starts getting salty
This is a retail chain with daily customers and not a construction company with an order backlog. It's hard to imagine that J.C. Penney has much visibility beyond the current quarter at any given moment. Heck, it's often difficult enough for retail chains that lack severely volatile results to predict the future one quarter out.


JC Penney Corporate Office. Source: JC Penney

Now consider the fourth quarter again. Let's ignore the fact that the company is celebrating a turnaround completion with an adjusted $0.68 per-share net loss. The 3.1% growth in sales during the November-December holiday period sounds great, but we already knew same-store sales for November alone were up 10.1%. This means December was a bust.

Making matters worse, part of the reason for November's sales spike may have simply been due to the severe discounting of leftover inventory that began in October. In some cases J.C. Penney slashed prices so severely that it was selling merchandise for less than wholesale cost. That would certainly explain why November showed more growth.

It's easy to go up from the bottom
No doubt that gains are better than losses. But J.C. Penney's sales situation was already so severely beaten down that it was almost as if sales had no other place to go but up. In the year-ago period, same-store sales plunged by a shocking 31.7%. A 2% improvement, and including severe discounting, suggests little recovery from the year-ago carnage.

For jcp.com, the bright spot of the current report, revenue was up nicely on a percentage basis but still only $381 million. Not only is this a fraction of overall revenue, but it's still 21% lower than the $480 million jcp.com achieved just two years ago. Many retailers, even struggling ones, are experiencing vast increases in online sales.

The first-quarter guidance was the most encouraging. But once again it's a 3% to 5% expected gain compared to a year-ago quarter that saw a 16.4% drop in same-store sales. It's a start, sure, but it may be a bit too early to pop the champagne. Take this turnaround with a grain of salt for now until more positive evidence surfaces in the months and quarters ahead.

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