Department store stocks tumbled on Thursday as investors reacted to weak first-quarter sales results across the sector.

On Friday morning, J.C. Penney (JCPN.Q) joined the earnings parade. It, too, reported a steep sales decline for the first quarter. Like mid-price rival Kohl's (KSS -0.13%), J.C. Penney appears to have been hurt by the slower processing of tax refunds this year.

The exterior of a J.C. Penney store

J.C. Penney's sales declined significantly last quarter. Image source: J.C. Penney.

However, J.C. Penney still managed to improve its earnings performance on a year-over-year basis -- just like Kohl's. Furthermore, management expects sales to rebound in the coming quarters.

J.C. Penney earnings by the numbers

Comparable-store sales slid 3.5% year over year at J.C. Penney last quarter. That's relatively in line with the trends reported by other department store companies that have announced their earnings this week. For example, Kohl's -- which faced an easier year-over-year comparison -- saw a 2.7% dip in comp sales during the first quarter.

Kohl's CEO Kevin Mansell stated that comp sales plunged 8% in February but declined just 1% in the March-April period. J.C. Penney saw similar trends, according to CEO Marvin Ellison.

Despite its sales declines, J.C. Penney was able to hold the line on profitability thanks to solid cost control along with improved pricing analytics that boosted gross margin.

J.C. Penney Key Q1 Metrics


Q1 2017

Q1 2016

Change (YOY)


$2.71 billion

$2.81 billion


Comparable-store sales

down 3.5%



Gross margin



up 10 basis points

SG&A expense ratio



up 20 basis points

Adjusted EPS




Free cash flow

($293 million)

($421 million)


Data source: J.C. Penney Q1 earnings report. YOY = year over year.

Excluding asset sales, J.C. Penney's earnings improved slightly on a year-over-year basis. Including $117 million of asset sale gains, J.C. Penney actually posted a small adjusted profit in the quarter. Similarly, free cash flow improved slightly if you exclude the impact of asset sales.

The balance sheet is getting healthier

While J.C. Penney has suffered at the hand of the weak retail sales environment since early 2016, its asset sales have enabled it to continue improving its balance sheet. Near the end of fiscal 2016, the company sold its home office campus for $353 million, while leasing back a portion of its space. Last quarter, it sold a distribution center in Buena Park, California, for $131 million.

J.C. Penney used the proceeds of these deals to pay down a $220 million debt maturity last quarter. It has also launched a tender offer to buy back $300 million of debt. These moves will reduce J.C. Penney's annual interest expense by about $40 million going forward.

This represents a meaningful amount of cost savings. Most notably, the savings will flow to J.C. Penney's bottom line regardless of the company's future sales results.

Looking ahead

Despite its slow start, J.C. Penney is maintaining its guidance for comp sales to be roughly flat (plus or minus 1 percentage point) and for EPS to reach a range of $0.40 to $0.65 for the full year.

That said, at this time last year, J.C. Penney expected to post full-year comp sales growth of 3% to 4% in 2016. Ultimately, comp sales came in flat for the year. Thus, investors may not want to rely too heavily on management's forecasts.

On the bright side, J.C. Penney did post positive comp sales in April. Additionally, it is in the midst of rolling out numerous initiatives that should boost sales growth later this year. For example, it is adding 100 more appliance showrooms, opening 70 new Sephora shops in its stores, converting another 50 salons to its successful "Salon by InStyle" concept, and piloting a variety of home services offerings.

J.C. Penney's management is certainly acting aggressively to get sales growing again. But until those efforts start to pay off, investors will probably remain skeptical of whether J.C. Penney has a long-term future.