J.C. Penney Is Back From the Dead

First-quarter results prove customers find the retailer a destination spot once more.

May 16, 2014 at 2:50PM

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Despite pundits giving up J.C. Penney (NYSE:JCP) for dead last year, the retailer turned in an earnings report yesterday that showed a Lazarus-like ability to return among the living once more. Make no mistake, a $352 million quarterly loss indicates it's still wheezing, but solid sales growth and a strong comp showing indicate Penney is well on the road to recovery.

The mid-tier retailer reported after the markets closed yesterday, with first-quarter net sales of $2.80 billion compared to $2.64 billion in the year-ago period, as same-store sales, or sales in those stores open for a year or more, were up 6.2%. In a sign that coming quarters may be just as healthy, sales improved in each month across the quarter. Comps are a key industry metric because it indicates organic growth and not expansion achieved through opening more stores. Equally important for Penney was that store traffic rose in April, the first positive occurrence it's seen there in 30 months.

Yet it still lost a heckuva lot of money, and the amount was slightly worse than the $348 million it lost last year, but it was much better than what Wall Street anticipated. Gross margins also improved 230 basis points to 33.1% compared to 30.8% a year ago. Operating losses were $247 million, but that was 49% better than last year.

Contrast Penney's performance to that of Kohl's (NYSE:KSS), which also reported earnings yesterday, and you can see its rival is now in a position similar to where Penney stood as it plunged into the abyss, with sales dropping more than 3% along with a similar drop in comps. Whereas both retailers complained about the winter weather -- Penney said at one point it was down $40 million to its plan just on weather alone -- Penney said it was able to recover last month in no small part because of strong Easter sales, while Kohl's did not. In fact, Kohl's pretty much avoided altogether the impact the holiday had, which suggests it got no lift whatsoever.

Even more telling might be the gains Penney made where Macy's (NYSE:M) lost ground. Sales at the higher-end rival fell 1.6% to $6.28 billion. While it posted per-share gains in profits, that was largely because it bought back some 20 million shares of its stock, otherwise earnings would have been flat on a per-share basis.

Penney also said yesterday that going forward, it will simplify its same-store sales calculations by removing estimates for returns along with liquidation sales. It says that will allow it to better compare year-over-year results, and had that formula been in place now, its first-quarter comps would have been an even stronger 7.4%, which includes e-commerce sales that grew 25.7 % over last year.

While I thought there was a lot to commend what former CEO Ron Johnson was doing at Penney, he miscalculated the consumer's willingness to be duped by doorbuster sales rather than enjoy everyday low pricing. Now that his successor has brought back the big sales, it's clear Penney's customer is responding, but that also means profits will continue to be pinched. Having shored up its financial base (it expanded its credit facility to $2.5 billion), the retailer now at least has the financial wherewithal to continue improving.

We probably shouldn't expect to see such dramatic gains much more often going forward -- Penney stanched the bleeding last year and has largely lapped the easiest comparables -- but slow, steady progress should put J.C. Penney back in the pink of health.

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Rich Duprey 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.

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