Shares of J.C. Penney (NYSE:JCP) opened 9% higher today after the company posted well-received financial results. 

It's hard to get too excited here. Sales still fell 5%, to $2.78 billion, weighed down by a 4.8% slide in comps. That does include the positive turn of 0.9% in October, but we knew about that two weeks ago. In the end, there's no point in celebrating a negative quarter when it came after a 26.1% plunge in same-store sales a year earlier during Ron Johnson's ill-advised reign. In other words, the average J.C. Penney department store is selling nearly 30% less than it did two years ago. Oh... and actually, the real store-level performance is even worse than that, because J.C. Penney includes the improving online sales into its comps. 

Bulls high-fiving one another today may want to rethink the celebration.

"What good is increasing sales if it comes at the expense of contracting margins?" I asked two weeks ago, warning that we should wait for this morning's performance before truly celebrating the positive same-store sales in October. Well, the news wasn't pretty. Gross margins slipped from 32.5% last year, to 29.5% this time around. J.C. Penney argues that gross margins were hurt, in part, by the chain's "transition back to a promotional pricing strategy," but that's not how longtime investors remember the retailer's promotions playing out. Gross margins have been on a terrible slide for years.

Q3Gross Margins
2009 40.6%
2010 39%
2011 37.4%
2012 32.5%
2013 29.5%

Source: J.C. Penney earnings releases.

J.C. Penney points out that the gross margin erosion is also happening as it clears out inventory. During its earnings call, it even pointed out that it had to sell some items below cost to clear out Johnson's lingering mistakes. That's fair, even if it means, ironically, that J.C. Penney is trying to get back to the point where it was before it brought in Johnson because it wasn't happy with its performance. However, with gross margins crashing, and the company conceding that it's offering ridiculous deals to clear out inventory, are you sure that we should be applauding those sales? What will J.C. Penney sell when it runs out of stuff to sell below cost?

That was a low blow, I'll concede, but let's get back to inventory. J.C. Penney points to its still-bloated inventory levels -- up $592 million sequentially -- as normal, because it includes its "typical seasonal build" in inventory as it readies for this shortened holiday shopping season. OK... but merchandise inventory is still $385 million higher than it was a year ago when it was in that same mode. J.C. Penney points out that it expects to bring inventory levels down to $2.85 billion at the end of the holiday quarter; but that's also well above the $2.34 billion it had at the end of the prior year's holiday quarter. 

"The turnaround of J.C. Penney is starting to take hold," CEO Mike Ullman proclaimed during this morning's earnings call. 

It's hard to turn things around when you're still falling.