J.C. Penney’s Sales per Square Foot Are Likely to Go Up, But Is It Enough?

J.C. Penney's (JCPN.Q) shares have been on fire after the company released its fourth quarter and full year earnings for 2013 on Feb. 26. Not only were the results better than expected, but the company gave a rosy picture for fiscal year 2014. J.C. Penney announced improvement in both comparable sales and online sales for the quarter, adding that this trend would likely continue throughout the next fiscal year.

Feeling relieved and optimistic due to this announcement, investors on Wall Street immediately started sending the company's stock higher and higher. It climbed 25% the following day, and upwards of 40% by the following Monday. Thanks to these results and comments made by J.C. Penney CEO Myron Ullman, J.C. Penney's sales per square foot are likely to go up in 2014. There are two reasons for this as the company makes its next moves to recover its brand and restore profitability. Unfortunately for J.C. Penney's long-term investors, these assured gains may not be enough.

Comparable sales
The first major reason that sales per square foot are highly likely to increase in fiscal 2014 is the comparable sales guidance that J.C. Penney's CEO gave in the company's fourth quarter earnings release. Not only were comparable sales up 2% in the fourth quarter, but according to Ullman, comparable sales gains are expected to range from 3% to 5% for fiscal year 2014.  

Sales, therefore, are projected to increase on account of J.C. Penney's recovery strategies such as bringing back formerly popular brands, bringing back discounts and coupons, and investing in different omnichannel outlets. This will help more and more customers to find their way back to J.C. Penney stores. While more customers translate into greater chances for sales both in stores and online going forward, this guidance alone isn't all J.C. Penney's shareholders have to look forward to.

Store closures
The second major reason that sales per square foot will likely increase is the number of J.C. Penney store closures set to take place. In January, J.C. Penney announced that it will close 33 underperforming stores (representing 3% of its total store count) in the first few months of 2014. It will also cut 2,000 jobs in the process.  

While the total square footage owned by the company will go down, the company will only lose the sales associated with the below-average stores being closed. This in itself will help the company's sales per square foot figure, which fell from $154 a square foot in 2011 to $116 in 2012. More importantly, closing these stores should help the company become more profitable in the long run.

Sales per square foot numbers for fiscal 2014 will likely be at the upper end of the company's guidance for comparable-store sales growth, as the all-important retail metric will be helped by the company's store closures. Assuming that J.C. Penney's sales per square foot can increase by at least 5%, J.C. Penney will likely register sales per square foot for 2014 anywhere between $120-$125.

We do not yet have the exact figures for fiscal 2013 as the company has yet to file its 10-K filing, but assuming a modest increase, it is hard to imagine J.C. Penney's sales per square foot coming in much higher than $130 this year. This is a sizable gain that is likely to be much more than the growth registered by competitors such as Macy's (M 1.44%) and Dillard's (DDS 6.45%). Macy's is at the top of its game, however, and currently generates sales per square foot of over $180. It is hard to grow from these lofty heights. Dillard's is an interesting case, and if J.C. Penney can slowly mount a turnaround this year then it may once again give Dillard's a run for its money.

Foolish takeaway
Hearing that comparable sales are expected to increase in 2014 is obviously good news, but none of these sales projections are set in stone. Time will tell if customers take positively or not to the company's ongoing recovery efforts. While closing 33 of its 1,100 stores is a step in the right direction, J.C. Penney will need to take further action to lift its sales per square foot back up to $150 and higher to complete this turnaround project. Investors should keep this in mind before making long-term investments in the retailer.