JCPenney: A Little Progress and a Lot of Problems

J.C. Penney reported same-store sales growth during its first quarter, but with revenue so far below historical levels the company's cost structure remains unsustainable. Profitability will require much faster growth, and that means that the negative traffic trends need to reverse.

May 26, 2014 at 9:22AM

Troubled retailer J.C. Penney (NYSE:JCP) showed improvement when it reported its first-quarter results last week, and shares of the company rocketed higher on the news. Same-store sales rose, gross margin expanded, and operating expenses were kept in check. While other department stores like Kohl's (NYSE:KSS) and Macy's (NYSE:M) struggled during the first quarter as rough weather ate into their sales, J.C. Penney's results appeared very good, at least on the surface. However, the fundamental problems that the company is facing still exist, and the first-quarter results aren't nearly as good as they seem.

Putting same-store sales into perspective
J.C. Penney grew its same-store sales by 6.2% during the first quarter, or 7.4% using the new calculation method that the company will use from now on. This is an acceleration compared to the fourth quarter's 2% increase, and it's significantly better than the negative same-store sales reported by Kohl's and Macy's.

However, there are two problems here. First, this 6.2% increase is from a significantly depressed level. In the first quarter of 2013, same-store sales declined by 16.6%, and in the first quarter of 2012, same-store sales declined by 18.9%. So while J.C. Penney appears to have performed well, the same-store sales growth needs to be put into perspective.


Q1 2012

Q1 2013

Q1 2014

J.C. Penney












Same-store sales growth
Growing same-store sales after two years of double-digit collapses is not all that impressive of a feat. While the first quarter this year certainly showed an improvement, it was a small improvement compared to an absolutely dismal first quarter in 2013. J.C. Penney did 6.2% better than absolutely terrible.

The second problem is the source of this same-store sales growth. Store traffic was down during the first quarter, so the entirety of the same-store sales growth came from an increase in transaction size. This isn't surprising, since J.C. Penney's main problem as it recovered from the Ron Johnson era was that it had a bunch of inventory that didn't resonate with its core customers. Working through that inventory and replacing it with products that customers wanted to buy was what drove same-store sales growth. This also accounted for the increase in gross margin during the quarter.

The fact that store traffic still decreased is not a good sign. Store traffic did increase during the month of April, as management pointed out during the conference call, but with Easter being on April 20 this year compared to March 31 last year, the timing of the holiday makes it difficult to tell if store traffic has finally turned a corner. The company has guided for a mid-single-digit increase this year in same-store sales, and this points toward traffic trends not getting much better.

J.C. Penney needs more revenue
Single-digit same-store sales growth is simply not enough, given the massive declines during the previous years. Even though J.C. Penney has managed its operating expenses well its cost structure is still unsustainable, especially compared to the competition:

Jcp Cost Structure

Even if J.C. Penney manages to get its gross margin back to the high-30s, the company's operating expenses as a percentage of revenue are so high that it will still record operating losses. While J.C. Penney has managed to reduce its operating expenses, it can only cut these costs by so much without closing stores. Management stated during the conference call that the current level of operating expenses will be roughly the run rate going forward, so there likely won't be much more cost cutting.

This means that the only way for the company to become profitable is to grow its revenue, because growing gross margin alone won't be enough. Growing revenue will require store traffic to begin to increase again. We'll have to wait and see if the gains during April are real or just the result of the timing of Easter, but if mid-single-digit same-store sales growth is an accurate projection for the year, then J.C. Penney is still a long way away from turning an operating profit. Also, this is before factoring in nearly $400 million in annual interest payments, based on the $97 million in interest the company paid during the first quarter.

The bottom line
While J.C. Penney showed improvement during the first quarter, a comparison to a dismal first quarter in 2013 makes the results appear better than they really are. Store traffic is still declining, and the same-store sales growth resulted from replacing unwanted merchandise with what customers wanted. J.C. Penney has still not proven that it can get customers back to the stores, and until then, profitability remains a distant dream.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recent recruited a secret-development Dream Team to guarantee their newest smart device was kept hidden from the public for as long as possible. But the secret is out...and some early viewers are even claiming its everyday impact could trump the iPod, iPhone, AND the iPad. In fact, ABI Research predicts 485 million of these type of devices will be sold per year. But one small company makes this gadget possible. And their stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Timothy Green 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

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.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

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. It's also featured on several dozen 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 ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers