Will J.C. Penney End Up Like Macy's or Like Sears?

J.C. Penney (JCPN.Q) will release its quarterly report on Wednesday, and investors hope that the long-awaited turnaround that thus far hasn't materialized will finally start to appear. Although strong earnings results from rival Macy's (M -2.12%) point to conditions in the retail industry that could support a rebound, J.C. Penney stock hasn't even managed to keep pace with Sears Holdings (SHLDQ), which has used value-unlocking strategies to try to bolster its share price.

J.C. Penney has gone through huge amounts of turmoil in recent years, including major renovations to its stores, multiple changes in leadership, and strategic shifts that haven't panned out the way the company and its shareholders had hoped. Despite having abandoned an attempt to move beyond its discount model, J.C. Penney hasn't yet seen customers return from Macy's and other retailers they favored when Penney's discounting came to an abrupt halt. Will those customers be back, or will Penney need to look at its real-estate holdings and other assets in the same way that Sears has? Let's take an early look at what's been happening with J.C. Penney over the past quarter and what we're likely to see in its report.

Source: J.C. Penney.

Stats on J.C. Penney

Source: Yahoo! Finance.

Will the red ink ever stop flowing at J.C. Penney?
Analysts have gotten a lot more pessimistic about J.C. Penney earnings in recent months, having doubled their loss estimates for the quarter ended in October and widening loss projections for the current and next fiscal years by 75% to 85%. The stock has continued its slide, losing another third of its value since mid-August.

Penney's recent woes have carried over from its results in the quarter ended in July, which included another massive loss on an unexpected 12% drop in sales. The retailer continued to spend more cash than it brought in, boosting its net debt by almost $2 billion during the first half of the year. Penney did say that it has already paid for most of the inventory and capital expenditures it plans to make this year, but the company's debt situation casts a shadow over its increasingly uncertain financial health.

One big problem that J.C. Penney now faces is that it has arguably taken advantage of investors' trust one too many times. In September, CEO Myron Ullman said J.C. Penney wouldn't need to raise new capital this year. That same afternoon, the company said it would make a secondary offering of 84 million shares priced to raise about $810 million. With such clear miscommunications at the topmost levels of management, Penney is finding it hard to have investors take its pronouncements on other matters seriously.

The key question for J.C. Penney is whether improving conditions in the industry will help or hurt it. Macy's noted strong same-store sales growth of 3.5% in its quarterly report last week; the sales hike pushed earnings up 22% even as Penney's rival boosted its net margin considerably thanks to successful cost-cutting measures. Macy's results show that shoppers are back in the malls, and so J.C. Penney needs to see the same success with similar concepts like in-store mini-shops.

If it can't benefit from better industry conditions, Penney might not have the same options as Sears Holdings in liquidation. Many analysts believe that Sears has untapped potential due to its real-estate holdings, but a similar analysis of J.C. Penney suggests not nearly as much unlocked value.

In the J.C. Penney earnings report, watch to see whether the retailer has finally hit bottom with same-store sales. If it can put together positive comps going into the holiday season, Penney just might generate enough buzz to make a run for the rest of the year.

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