J.C. Penney's Friday Pop -- Is It Time to Get Into the Shares?

J.C. Penney's first-quarter results impress the market, but is it enough?

May 15, 2014 at 10:56PM
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The lowest weekly initial jobless claims figure in seven years was not enough to lift U.S. stocks on Thursday, with the benchmark S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES:^DJI) down 0.9% and 1%, respectively. Unusually, the technology-heavy Nasdaq Composite Index (NASDAQINDEX:^IXIC) was less volatile than the former two indexes, losing just 0.8%. In company-specific news, it appears that disappointing results from Wal-Mart Stores (NYSE:WMT) and Kohl's this morning weighed on the retail sector today, including J.C. Penney (NYSE:JCP), which fell 2.8%. But J.C. Penney shares will make that up -- and more -- tomorrow, as the shares surged by nearly a fifth in today's after-hours session on better-than-expected first-quarter results. Is it time for investors to take a look at this turnaround story?

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On the numbers: J.C. Penney beat Wall Street's expectations for revenues and earnings per share, as the following table demonstrates.

 

Actual/ Year-on-year growth (decline)

Analysts' c onsensus estimate

Revenues

$2.8 billion

6.3%

$2.7 billion

Earnings-per-share

($1.15)

(27.2%)

($1.25)

Source: J.C. Penney, Thomson FN

A same-store sales increase of 6.2% is impressive compared to its larger (and more stable) rivals – U.S. same-store sales at Walmart were flat, for example. However, this is partially a reflection of the challenges J.C. Penney faces and, consequently, greater volatility in its operating results.

Nevertheless, the company's outlook for the full year was pretty upbeat, including a mid-single-digit increase in same-store sales, significantly improved gross margin versus 2013, and free cash flow at breakeven. Moreover, the company appears to have warded off the risk of a cash crunch with an increased credit facility of $2.35 billion.

Where does that leave investors?
In early February when J.C. Penney announced its first instance of quarterly same-store sales growth in two-and-a-half years, I nevertheless wrote that individual investors ought to avoid the stock. Since the publication of that article on Feb. 4, the stock is up by nearly two-thirds – and that doesn't even include the pop the shares will experience tomorrow.

Was I wrong? In a very basic sense, the answer is, "Obviously, yes." In hindsight, it's now clear that the pessimism surrounding the stock was culminating as I was writing the article (literally so -- the shares put in their 52-week low of $4.90 on the publication date.) However, it's worth reviewing the rationale I invoked at the time, which had nothing to do with trying to second-guess investor sentiment:

Turnarounds are very difficult to pull off. Turnarounds in the brutally competitive retail sector are even more challenging, and the results can't always be maintained -- at which point, another turnaround becomes necessary. J.C. Penney belongs in the "too hard" pile – investors would be better off focusing their limited time and resources on outstanding, durable businesses.

Furthermore, one decent quarter does not diminish the challenges still ahead for J.C. Penney. The company isn't expected to earn a profit this year or the next; meanwhile, larger, profitable competitors -- bricks-and-mortar and online -- aren't exactly standing still. J.C. Penney may provide market-beating returns for investors who are either lucky, or a combination of knowledgeable and dedicated (or all three), but I continue to think the shares are generally unsuitable for individual investors.

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Alex Dumortier, CFA 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.

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