What happened

Shares of J.C. Penney (JCPN.Q) shot up as much as 14% in early trading on Aug. 15 following the release of the company's second-quarter results before trading. The struggling retailer reported sales of $2.5 billion and a loss of $0.15 per share, an improvement from last year's $0.32-per-share loss and far better than Wall Street's expectation for a $0.31-per-share loss in the quarter.

So what

It's looking like early traders bought on the bottom-line beat. Also encouraging was news that the company was partnering with clothier thredUp to offer secondhand women's clothing and handbags in 30 J.C. Penney stores.

Man at fork in road.

It's far from clear whether Penney will turn toward a recovery or bankruptcy. Image source: Getty Images.

However, after the big early surge, investors quickly turned from buyers into sellers. As of 1:18 p.m. EDT, shares are down 1.4%, as it's looking like a dose of reality is setting in.

Looking beyond Penney's earnings beat and the enticing prospects of selling fancy used clothes in a handful of stores, the company continues to struggle mightily. Comps, or sales at stores open for more than one year, fell a painful 9% overall. Even when adjusting for categories Penney's no longer sells (such as furniture and major appliances), comps were down 6%.

There were some financial positives from the quarter as well. The company burned through $268 million in negative free cash flow in the first quarter but generated solid positive cash flow in Q2. Through the first half of the year, its free cash flow improved to negative $133 million, $102 million ahead of the same result halfway through 2018.

The company also reduced its inventory by 12.5%, a stated goal of management to improve its cost profile and reduce its history of ending up with leftover product it then sells at heavy markdowns.

Now what

Not only did J.C. Penney show some improvements in its cash flow, but it does have significant liquidity to help it ride out the ongoing losses. Management says it expects to have about $1.5 billion in available liquidity -- a combination of cash and debt -- for the remainder of 2019. Moreover, management reaffirmed guidance for full-year free cash flow, though it's likely much of that positive cash will be a product of substantially reduced inventory spending, not improved sales or better operating results.

And that's not a sustainable way to generate positive cash flow. Simply put, it's not clear whether management's turnaround plan will take. Sales, even adjusted for exited product categories, continue to fall, and until there's evidence customers are interested in coming back and spending in a sustainable way, there's substantial risk.

With shares trading for substantially less than $1 -- as of this writing, it was about $0.57 per share -- Mr. Market clearly sees a bleak future for the 117-year-old retailer. The company has liquidity for the short term but also has $4 billion in debt, including $197 million that must be repaid or refinanced within 12 months.

Put it all together, and it's pretty clear why, after the initial exuberance, Penney's shares have given up their gains today. The company's second quarter was "less worse" than expected. But less worse isn't good, and it's also not close to being worthy of calling a turnaround. Consider accordingly, and accept the risk of losing whatever you invest in this troubled retailer.