Where J.C. Penney Is Failing and Best Buy Is Succeeding

Early today, J.C. Penney (NYSE:JCP) confirmed its fourth-quarter guidance, based on its December sales. That turned out not to be great. It's as if your kid's teacher says that he's only going to manage a C this semester, then things look pretty good all semester long, so you get your hopes up for maybe a B -- maybe an A, who's to say? Then when the report card comes in the mail, it's still a C. Oh, dang.

Christmas at J.C. Penney
J.C. Penney has had a few of these sort of announcements recently. At the beginning of December, it gave a holiday update, saying comparable Thanksgiving weekend sales were up 10% over the year before. Online sales were doing well, and everything was coming up Milhouse. Oh, and promotions were playing heavily in the mix. Analysts were quick to realize that maybe this wasn't the best news and the stock dropped off a cliff.

Today's announcement confirmed guidance that the business gave back in November. The plan was for a year-over-year increase in comparable sales and gross margin, with a fall in expenses. Confirming that guidance should have been good news, but the market had gotten its hopes up.

Between Nov. 20 -- when the third-quarter results were released -- and the end of 2013, the stock rose 5%. Even with the pullback from the holiday announcement, J.C. Penney managed to gain some ground. Now, investors are less inclined to be looking for surprise good news.

Margin pressure
While J.C. Penney has projected a rise in gross margin, promotions are definitely going to be the driving news behind the fourth quarter of many retailers. Best Buy (NYSE:BBY) has also been working on a comeback, but its fourth quarter was likely put under pressure from heavy competition. The brand predicted strong sales but shrinking margins. That's a story that is likely to play out for J.C. Penney as well.

Both companies suffered in 2012 and both seemed to make a clean break in 2013. Best Buy managed to escape a bid from founder Dick Schulze, while J.C. Penney finally dropped CEO Ron Johnson. Finishing off the year on a strong note was key for both businesses, but only Best Buy managed to pull it off.

The company was able to play to its strengths -- appliances and mobile devices -- in order to rebuild its foot traffic and brand strength. J.C. Penney has, so far, been unable to get its old customers back through the doors, losing out to competitors like Macy's and TJX's brands.

In short, J.C. Penney is bringing home a C in economics this semester and investors recognize it. The long-term problems for J.C. Penney aren't being solved, and that puts the whole business in jeopardy. Investors looking for a rebound are better off looking into other brands. Even if J.C. Penney eventually manages it, the opportunity cost from waiting for a turnaround justifies seeking out better brands.