Is JCPenney Back in the Game?

J.C. Penney Company (NYSE: JCP  ) shares were up over 20% after-market Thursday following its first-quarter report. The retail chain suffered a rough patch after its new CEO attempted a total overhaul -- and was promptly fired. Undoing the overhaul has sent metrics on a wild ride, but the fourth-quarter report showed improvement. Did J.C. Penney's first-quarter results rival those of Macy's  (NYSE: M  ) and Nordstrom  (NYSE: JWN  ) ? 

Source: J.C. Penney.

Returned CEO Myron "Mike" Ullman had a tough job trying to undo the renovation efforts of short-term leader Ron Johnson. The process drove up inventory while slowing turnaround and eating margins. However, the company fought through and turned in holiday sales data that came in between the results of its competitors. 

Did the first quarter continue J.C. Penney's upward trend? 

Estimate beat 
Analysts expected J.C. Penney to post revenues of $2.7 billion and a loss per share of $1.25. The company reported $2.8 billion and a loss per share of $1.15.

Competitors Macy's and Nordstrom also reported their first-quarter results in the same week. Macy's reported $6.28 billion in revenue, which missed analysts' estimate of $6.47 billion, but met the earnings-per-share estimate of $0.60. Nordstrom met revenue expectations with $2.8 billion and exceeded the $0.68 EPS estimate with $0.72.  

Comparable-store sales
J.C. Penney reported comps growth of 6.2%. Macy's first-quarter comps were down nearly 2% and Nordstrom's were up over 3%. J.C. Penney reported its second consecutive quarter of comps growth. 

The first-quarter comps exceeded J.C. Penney's own expectations, but the year-over-year growth isn't as great as it looks at a glance. Comps in last year's quarter were down nearly 17%, so while the 6% improvement this year was great news, J.C. Penney still has some climbing to do before it posts strong comps without a weak comparison quarter.

However, J.C. Penney will soon change its method of comps calculation to make comps results more comparable year over year. In the first-quarter earnings release, the company stated that items such as sales return estimates and liquidation sales will no longer factor into comps calculations. If the new method had applied to the first quarter, the reported comps would've jumped over 7%.

Also, comps weren't the only metric improving for J.C. Penney in the first quarter. 

Gross margin improvement
J.C. Penney's gross margin was up 230 basis points year over year. However, the earnings release said that margins were negatively affected by an increase in clearance sales -- as a percentage of total sales -- in the months of February and March. Strength in April due to the shifted Easter holiday made up for those losses. 

The increased clearance sales matter because J.C. Penney has had inventory issues in the past year as Ullman undid Ron Johnson's renovations and brought back popular private brands. However, margins were still up for the quarter and shakiness was expected as the company finished up the second part of a three-part strategy that included a stabilization phase that started last spring and a rebuilding phase later in the year. 

Now J.C. Penney plans to move into the "go-forward" phase.

Go-forward guidance
The company's second-quarter guidance estimates a comps increase in the mid-single digits and a sequential gross margin improvement from the first quarter. For the full year, J.C. Penney expects comps to increase in the mid-single digits and gross margin to improve significantly over 2013. 

Foolish final thoughts 
J.C. Penney has turned in two quarters with better-than-expected results. It was risky to remove Ron Johnson midstream, but Mike Ullman seems to have returned the brands that customers desire while keeping promotions from completely swallowing margins. If the second-quarter report looks even rosier, count J.C. Penney officially back in the game.

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