J.C. Penney Company Earnings: Will the Rebound Continue?

On Thursday, J.C. Penney (JCPN.Q) will release its quarterly report, and hard-hit shareholders have started to hope that the worst for the ailing retailer might be over. Even though competitors Macy's (M 1.19%) and Kohl's (KSS 6.51%) have taken advantage of J.C. Penney's miscues to woo customers away, expectations are so low for Penney that even the slightest hint of a long-term recovery has been enough lately to send the stock moving higher.

J.C. Penney has gone through a tough few years, as what investors had expected to be a solid turnaround led by a savvy retail expert turned out to produce a failed strategy that the company has subsequently abandoned in large part. Now, J.C. Penney has returned to the discounting business model that caused it so much trouble in the first place, and in the long run, it's still unclear how Penney will distinguish itself from its retail competitors. Nevertheless, with signs that the retailer has hit bottom, value-hunting shareholders want to know if Penney can keep itself moving modestly upward. Let's take an early look at what's been happening with J.C. Penney over the past quarter and what we're likely to see in its report.

Source: J.C. Penney.

Stats on J.C. Penney

Source: Yahoo! Finance.

Can J.C. Penney earnings keep beating expectations?
In recent months, investors have actually gotten a bit more pessimistic about J.C. Penney earnings, widening their April-quarter loss estimates by a dime per share and making similar adjustments to their projections for next fiscal year. The stock, though, has soared 65% since early February.

J.C. Penney's fiscal fourth-quarter report gave the stock a huge boost, rising 25% in a single day after the retailer said that same-store sales rose 2% during the holiday quarter. Even though Penney reported a loss, it was less than half as large as its losses from the previous year's quarter, and the retailer also gave positive guidance for the current year that included expectations of a 3% to 5% rise in same-store sales for the fiscal first quarter. In large part, the bullish move shows just how negative shareholders have gotten on the stock, as signs of even modest future growth were enough to convince some that J.C. Penney's long slide has ended and that the exodus of customers to Macy's and Kohl's might finally be ending.

But Penney still has work to do to execute on its turnaround strategy. The need to conserve cash will require J.C. Penney to cut its capital expenditures budget by about three-quarters in 2014 compared to last year, and that will force Penney to get more from less. Yet with huge levels of outstanding debt, J.C. Penney can't afford to lose sight of the financial pressures that could hold back the stock even if the underlying business keeps making modest improvements.

Moreover, even with its improving conditions, Penney still has to deal with strong competition. Macy's results in the holiday quarter were extremely strong, with double-digit gains in net income and improving same-store sales figures, even from a much higher base than Penney. Kohl's didn't have as good a quarter, but many of the same factors that held it back could also have an adverse impact on J.C. Penney, especially weather-related sluggishness.

Perhaps most encouragingly, J.C. Penney's supplier partners are getting their confidence back. Late last month, corporate executives at the maker of Calvin Klein and Tommy Hilfiger apparel said that their sales at Penney have been stronger than they expected at this point in the retailer's recovery, and they're encouraged by the progress that Penney has made. If J.C. Penney can convince its closest partners that its comeback is for real, that's a key step for the retailer's future.

In the J.C. Penney earnings report, be sure to look back to last year to see the base against which the company is making comparisons between this year's results and last. Otherwise, any signs of growth might lead you to the false impression that Penney has gotten back to normal. The process of recovery will be a lot longer than investors would like, but if it can make slow and steady progress, Penney might well get healthy again in the long run.

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