Check out the latest J.C. Penney earnings call transcript.

Two months ago, J.C. Penney (JCPN.Q) reported a sharp slowdown in sales for the third quarter of fiscal 2018. New CEO Jill Soltau indicated on the company's earnings call that investors shouldn't expect much sequential improvement in the fourth quarter.

On Tuesday afternoon, the struggling department store chain confirmed that comparable-store sales fell again during the critical holiday period. J.C. Penney also acknowledged that it will probably need to close more stores as part of its turnaround effort.

Financial metrics come in as expected

Prior to J.C. Penney's recent guidance update, it seemed possible that the retailer had exceeded management's dour outlook during the holiday selling season. For one thing, retail sales surged in November and December, according to the weekly Redbook Index. Additionally, a private research firm estimated that traffic to JCPenney stores increased 10% year over year between Black Friday and Dec. 9, based on satellite imagery.

Nevertheless, J.C. Penney recorded a 3.5% comp sales decline for the nine-week period that ended on Jan. 5 (on a shifted basis that adjusts for an extra week in the 2017 fiscal year). This more or less reversed its 3.4% comp sales increase during the same period a year ago.

On the bright side, J.C. Penney still expects to produce positive free cash flow for the full year, helped by an 8% reduction in inventory. This will leave it with more than $2 billion of liquidity at the end of fiscal 2018.

The exterior of a JCPenney store.

J.C. Penney's holiday season results were in line with management's expectations. Image source: J.C. Penney.

Store closures on the table again

While J.C. Penney's results were in line with management's outlook, this type of performance clearly isn't sustainable. Even before fiscal 2018, J.C. Penney was struggling with weak profitability and high debt, and comp sales declines will only make matters worse. As a result, management is contemplating another round of store closures.

Indeed, while J.C. Penney closed 139 stores in 2017 and several more in early 2018, it hasn't been as aggressive as its better-performing competitor Macy's (M 1.44%). Between fiscal 2015 and fiscal 2018, Macy's cut its square footage by about 13%, compared to an 11% reduction for J.C. Penney. Furthermore, J.C. Penney has almost 50% more full-line stores than Macy's, suggesting that it may have too many stores in some parts of the country.

For now, J.C. Penney says it will close three stores this spring. It didn't list the locations of those stores, but one of them is likely to be the JCPenney store at Northgate Mall in Seattle. The company previously confirmed that it will close that location in 2019 as the mall prepares for a redevelopment project.

Management will also evaluate the rest of J.C. Penney's store portfolio over the next several months with an eye toward future store closures. It aims to identify stores that aren't making enough money -- as well as valuable locations that could be sold to help fund debt-reduction efforts.

How much cash can J.C. Penney raise?

Just in the past three years, Macy's has brought in more than $1 billion of cash from selling real estate. While Macy's downtown stores have fetched the biggest sums, it has also sold several mall-based stores at prices of $40 million or more.

This hints at the opportunity for J.C. Penney to reduce its debt by selling some of its best real estate. The company's real estate portfolio isn't as good as Macy's, but J.C. Penney still owns numerous stores in high-performing malls. While those stores are likely to be among J.C. Penney's more profitable locations, in many cases the value of the real estate to the mall owner or another real estate investor could far outstrip the value of continuing to operate the store.

Even the store that is set to close at the struggling Northgate Mall in Seattle has an assessed value of $8.2 million -- and it could be worth even more than that due to a new light-rail station that will open right next to the property in 2021.

J.C. Penney currently has more than $4 billion of debt and has been spending upward of $300 million annually on interest payments. If selling some of its more valuable stores allows it to make a big dent in that debt load, that would be great news for shareholders. With less debt, J.C. Penney would be in better position to withstand a potential recession in the next few years.

A healthier balance sheet would also enable management to direct its full attention to turnaround initiatives. In the long run, J.C. Penney's ability to get comp sales growing again will be the main thing determining whether it can survive the ongoing retail industry turmoil.