Earlier today, shares of J.C. Penney Company (NYSE:JCP) rose as high as 10.6%, even as the company failed to match analyst expectations. For years, the company has seen its business declining marginally, but since 2011, the gradual downturn in business turned into a waterfall. From 2011 through 2012, J.C. Penney saw its revenue decline by 24.8% from $17.26 billion to around $13 billion. In that same time, its net loss rose by 548% from $152 million to $985 million.

Based on Mr. Market's reaction today, it is clear that investors expect J.C. Penney to recover from its dire financial position. However, after experiencing a downturn due to poor management decisions, is this likely or is it more likely that investors are being overly optimistic?

Earnings disappointed
For the company's third fiscal quarter, analysts expected it to post earnings per share of -$1.72 on revenue of $2.8 billion. In both categories it came up somewhat short. For starters, revenue came in at $2.78 billion, 0.7% shy of analyst estimates and 5.1% lower than the $2.93 billion the company reported the same quarter a year ago.

According to J.C. Penney's earnings release, the drop in revenue came about primarily as a result of a 4.8% decline in comparable store sales. Admittedly, this is bad for shareholders, but there was some light at the end of the tunnel; in October, the company saw a 0.9% increase in comparable store sales, its first increase since 2011.

Earnings per share came in at -$1.94, primarily due to lower revenue, combined with higher depreciation and its cost of goods sold rising from 67.5% of sales last year to 70.5% of sales this year. The latter can be attributed to lower sales prices from the reintroduction of coupons and storewide sales to rid itself of excess inventory from its first two quarters.

On top of lower sales and margins, the company incurred a one-time expense of $36 million relating to its sale of shares to Martha Stewart Living Omnimedia (UNKNOWN:MSO.DL). In 2011, Martha Stewart and J.C. Penney agreed to work in concert to market Martha Stewart products at its stores and to provide a store-within-a-store setup for Martha Stewart. Due to an exclusivity contract between Martha Stewart and retail rival Macy's (NYSE:M), whereby the latter would be the sole distributor of Martha Stewart Collection items, a lawsuit broke out between the three.

According to the lawsuit, Macy's alleged that Martha Stewart breached its contract and that J.C. Penney acted to interfere with their business relationship. The court ruled that J.C. Penney and Martha Stewart must revise their contract in a way that does not infringe upon Macy's exclusive rights to sell Martha Stewart Collection items, to which both entities agreed to reduce their involvement with one another. As part of the deal, J.C. Penney agreed to sell the ownership it initially bought from Martha Stewart back to it.

How does J.C. Penney stack up against its peers?
While it is nice to see what is happening with J.C. Penney, it would be foolish, not Foolish, to rely on this data alone in formulating an investment decision. The Foolish investor should also take into account how its business is doing compared to peers like Macy's and Kohl's (NYSE:KSS).

For its most recent quarter, Macy's outclassed its competition. Revenue rose by 3.3% from $6.08 billion to $6.28 billion while earnings per share rose 30.6% from $0.36 to $0.47. Both results handily beat analyst expectations. According to management, the increase in revenue was primarily derived from a 3.5% increase in comparable store sales (4.6% if you include the company's store-within-a-store setups). In addition to revenue improving Macy's bottom line, it also benefited from fewer shares outstanding as management increased its share buybacks.

Kohl's, on the other hand, performed less well. Revenue for the quarter fell by 1% from $4.49 billion last year to $4.44 billion this year. As the company has had difficulty appealing to its customer base, its underlying business has gradually deteriorated. This is, perhaps, most evident in its net income, which fell by 17.7% as revenue declined and costs have risen as a percentage of sales. The result for the business was earnings per share coming in at $0.81, a 5.8% shortfall of the $0.86 that analysts expected.

Foolish takeaway
Based on the evidence provided by management in today's earnings release, it is clear that the situation at J.C. Penney is less than ideal. Both its top line and bottom line are falling compared to what they were at a year ago and at a rate that is faster than Mr. Market anticipated. However, business is turning around as demonstrated by its October sales, but the company is still in the early stages of its recovery. As such, it would be hard to argue that J.C. Penney is an ideal investment, but if its turnaround efforts are successful, it is likely that investors will be handsomely rewarded.