Will J.C. Penney Confirm the Retail Industry's Recovery?

J.C. Penney corporate home office. Image source: J.C. Penney.

Investors in discount retailer J.C. Penney (JCPN.Q) have gone through tough times for years, and the company hasn't yet been able to find a path to turn around its money-losing business in a convincing fashion. Yet several of Penney's competitors have recently announced extremely strong results that signal a possible rebound for the hard-hit retail industry.

Coming into the company's second-quarter financial report on Friday, J.C. Penney investors hope that their company will join the retail recovery and post better-than-expected results. Still, Penney faces plenty of uncertainty, and hopeful investors have gotten disappointed before by lackluster results. Let's take an early look at how J.C. Penney has done recently, and whether it can join its peers with a solid gain.

Stats on J.C. Penney

Source: Yahoo! Finance.

Can J.C. Penney earnings create even more retail excitement?

In recent months, investors haven't had much enthusiasm in their assessment of J.C. Penney's earnings prospects, widening their loss estimates for the second quarter, and cutting their projections for this fiscal year and next. The stock has reflected much more optimism, however, jumping 18% since early May.

J.C. Penney's first-quarter report offered a mixed view of the retailer's prospects, and those of the industry overall. Comparable-store sales fell 0.4% for the quarter, and markdowns due to unseasonable weather hurt the company's overall gross-margin figures. Penney nevertheless pointed to potentially better times ahead, providing guidance that included comps growth of 3% to 4% for the full year and a return to profitability on an adjusted-earnings basis. CEO Marvin Ellison characterized the quarter as "challenging from a sales perspective," but pointed to initiatives designed to bolster future results.

In particular, a couple of Penney's efforts were noteworthy. In the success column, the retailer's collaboration with Sephora has done extremely well, and Penney expects that it will continue to expand its relationship with the cosmetics specialist through additional Sephora locations. The most interesting thing about the collaboration is that it breaks the mold of seeing Penney as a discount retailer, lending Sephora's high-end reputation to lure a different set of customers into Penney's doors.

The other aspect that Penney is watching closely is its decision to accelerate the rollout of appliances. The move differentiates Penney from most of its retail competitors, leaving it to go more head-to-head with Sears Holdings and its offerings of Kenmore and other appliance lines.

With a pilot program in 22 stores going well, Penney expects to have appliance sales in 500 locations, as well as its online website. Investors hope that the move will bolster sales figures, and understand that the company could take a margin hit as a result; but still, they want to see a positive impact on J.C. Penney's financials.

Nevertheless, expectations are high for Penney, largely because its peers have been putting up some impressive numbers in recent days. The trend among department stores appears to be a return of customers to physical mall locations, and some moves that competitors have taken to optimize their store networks by closing unprofitable locations have paid off in better profits. That won't necessarily help Penney, but if traffic levels generally are on the rebound, then shareholders will want to see evidence that the retailer is getting its fair share.

In J.C. Penney's earnings report, investors will want to compare the company's results to those of its closest rivals. Given the jump in share prices in recent days, shareholders already have high expectations that Penney will participate in the retail rally.

Anything short of full success could lead to a huge retrenchment in J.C. Penney's share price. That, in turn, would force shareholders to reconsider whether a long-term turnaround is truly in the cards for the retailer.