J.C. Penney: Explosive Turnaround or Short-Term Rebound?

Why the coming earnings release from J.C. Penney could be crucial in terms of evaluating the company's chances of implementing a successful turnaround.

May 14, 2014 at 8:35AM


Source: J.C. Penney.

J.C. Penney (NYSE:JCP) has risen by an explosive 60% over the last three months as investors are gaining confidence about its chances to implement a successful turnaround, but the company is not out of the woods yet. With J.C. Penney scheduled to report earnings this week, in addition to imminent earnings reports from competitors Macy's (NYSE:M) and Kohl's (NYSE:KSS), investors have important reasons to pay close attention to announcements in the sector over the coming days.

Signs of improvement
On Feb. 26, J.C. Penney delivered encouraging news to investors, announcing a material improvement in sales during the quarter and optimistic guidance for the rest of the year.

Total sales during the quarter ended on Feb. 1 increased by 1.6% to $3.78 billion when excluding the 53rd week in 2012. Comparable-store sales grew by 2% versus the same period of the prior year, which signals stabilization and even perhaps the beginning of a turnaround.

Gross margin came in at 28.4% of sales, an increase of 460 basis points versus 23.8% in the year-ago quarter. However, J.C. Penney is still in the red, and margins remain materially below the profitability levels reported by competitors.

While Kohl's had a challenging quarter during the period ended on Feb. 1, it reported an increase in gross margins to 34% of sales versus 33.3% during the same quarter in 2013.

Macy's is doing materially better than other department stores, delivering industry-leading gross margins at 40.6% of revenues during the quarter ended on Feb. 1. This was stable compared to the prior year.

If J.C. Penney is going to turn a profit in the coming quarters, it will need to start generating higher margins, which is not easy to do considering that the retail industry is notoriously competitive when it comes to pricing lately.

One of the biggest reasons for optimism regarding J.C. Penney is that management provided fairly strong guidance, both for the coming quarter and the full year.

The company expects comparable-store sales to increase between 3% and 5% during the first quarter of fiscal 2014 and by mid-single digits during the full fiscal year. In addition, the company is forecasting gross margin to "improve significantly" versus 2013, both in the coming earnings release and through the full year.

Time to deliver
J.C. Penney will be reporting earnings after the market close on Thursday, while Macy's is scheduled to report on Wednesday before the open and Kohl's will announce earnings on Thursday morning. This means investors will be getting valuable information to evaluate J.C. Penney, both on a stand-alone basis and in comparison to peers, this week.

Based on the latest earnings report, it's hard to tell whether sales are really stabilizing or if J.C. Penney delivered a short-term bounce in November via unsustainably aggressive promotions. The company had previously announced an increase of 10.1% in comparable-store sales during the month of November, so a 2% overall increase for the November to January quarter could have been achieved in spite of lackluster performance in December and January.

If J.C. Penney can deliver in accordance with guidance for an increase of between 3% and 5% in same-store sales during the February to April quarter, this would provide a lot of validation for the bull thesis by showing that the company is in fact stabilizing sales in a permanent way, as opposed to relying on unsustainable short-term discounts to inflate revenues.

While Macy's delivered an increase of 2.3% in comparable-store sales during the last quarter, management is forecasting comparable sales during the current fiscal year to grow in the range of 2.5% to 3%. Kohl's suffered a decline of 2% in comps during the last quarter, and management is expecting comparable sales to be between flat and a 2% increase during the first quarter of fiscal 2014.

An increase of between 3% and 5% in comparable sales for J.C. Penney would not only mean that the company is clearly improving but also outgrowing the competition. Especially if J.C. Penney can manage to continue to raise profit margins to levels more in line with those of the competition, this would be a big positive for investors.

On the other hand, disappointing sales and margins would indicate that management is overpromising and underdelivering, not exactly a good sign when it comes to evaluating the company's prospects for a turnaround.

Foolish takeaway
J.C. Penney has delivered encouraging news for investors lately, but it's still not clear whether the company is implementing a sustainable turnaround or if improvements in the latest earnings report were only transitory. The coming earnings release from J.C. Penney could be crucial in terms of evaluating the risks and potential for gains in the medium term.

You don't want to miss our best pick for 2014, do you?
Give me five minutes and I'll show how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks one stock with outstanding potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on one of the upcoming year's most lucrative trends. Last year, his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252%, and 1,303% over the subsequent years! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.

Andrés Cardenal has no position in any stocks mentioned, and neither does The Motley Fool. 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers