For J.C. Penney (NYSE:JCP) investors, there's good news and bad news.

The good news is that the stock surged 23% following the company's fourth-quarter earnings report on Thursday. Although the numbers themselves were weak, earnings per share topped analysts' estimates, and new CEO Jill Soltau still seems to be in her honeymoon phase with Wall Street just a few months after taking the top job.

The bad news will take a little longer to get through. 

First, the department store chain said its comparable sales fell 4% in the fourth quarter, even as most of its peers reported comp sales growth and the broader retail industry had one of its best holiday seasons in years. Penney's 4% comp sales decline was actually worse than the 3.5% decline it reported for the first nine weeks of the fourth quarter in its holiday update in January.

Back then, management projected it would finish the year with positive free cash flow. While J.C. Penney did report positive free cash flow of $111 million for fiscal 2018, it relied on $144 million of asset sale proceeds to juice that figure. Excluding asset sales, free cash flow was negative $33 million last year.

On the bottom line, adjusted earnings per share fell to $0.18 from $0.51 in the prior-year period, though that beat the analyst consensus of $0.11.

As the company had alluded to in its holiday update, management said it would close 18 full-line stores this year, including the three previously-announced locations, along with nine ancillary home-and-furniture stores. Management explained that the stores marked for closure are significantly underperforming the rest of the chain, so removing them could help the overall financial picture. Senior Vice President of Finance Trent Kruse hinted that more store closures could come next year.

Finally, J.C. Penney declined to provide specific guidance for 2019, only saying that it expected to generate positive free cash flow for the year.

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

The exterior of a J.C. Penney department store

Image Source: J.C. Penney.

A long shopping list

Soltau, who became CEO last October, was clear-eyed about the work ahead, saying, "We need to continue to move faster; we need to reestablish the fundamentals of retail at J.C. Penney and build capabilities focused on satisfying the wants and expectations of our customers."  

Filling out her leadership team is at the top of her to-do list, and Soltau announced a number of hires on the earnings call. First was new Chief Merchant Michelle Wlazlo, who has 30 years of industry experience and was most recently SVP of apparel and accessories merchandising at Target. The company also tapped John Welling, a former executive at The Michaels Companies, to be its new SVP of Planning and Allocation, and added Mark Stinde as SVP of Asset Protection. Stinde most recently held a similar position at 7-Eleven.

At several points during the call, management discussed the topic of "shrink" -- the industry term for loss or damage of inventory from shoplifting, employee theft, or other causes. Shrink has been significantly worse than normal at J.C. Penney recently. Stinde will be in charge of solving this problem.

Elsewhere, Soltau said one of her key priorities is to strengthen the company's omnichannel capabilities -- its ability to leverage the combination of its online and in-store operations -- and that she was searching for someone to lead J.C. Penney's e-commerce operations. The company is also still hunting for a permanent CFO to replace Jeffrey Davis, who quit in September. 

Another vital task is rebuilding the chain's women's apparel business -- its biggest category, and one that seemed to be neglected under former CEO Marvin Ellison, who instead focused on the home department and appliances. Soltau said last month that the retailer would stop selling appliances, and focus instead on higher-margin categories that are within its core competencies, like apparel and soft home. In the holiday quarter, women's apparel delivered a positive comp, showing the category is moving in the right direction.  

The retailer also reduced its inventory by 13% on a year-over-year basis in Q4, and Soltau sees further reductions in inventory as key to lifting the company's gross margin and driving better profitability. Additionally, she highlighted better training and efficient deployment of its employees and a better merchandising assortment strategy as future areas of focus.

At this point, J.C. Penney stock has fallen so far that even the slightest hint of a possible turnaround can send the share price soaring, as investors saw after the earnings report. As management made clear, there is a path back to profitability and sustainability, starting with improving inventory levels, gross margin, and its women's apparel offerings. However, that path will be a long and difficult one. In the meantime, plenty of risks remain, including competitive threats and a possible recession.

For now, the best news for investors may be that many of those risks appear to be baked into the stock price already.