J.C. Penney (JCPN.Q) fell below $5 per share on Tuesday after the company's latest financial update disappointed investors. The stock hasn't been at these levels since 1982, so contrarian investors may feel tempted to consider a long position in the company at discounted prices. However, things could easily continue getting worse before they become any better for J.C. Penney.

Too little, too late
The company announced a 3.1% increase in comparable sales during the nine weeks covering the key months of November and December. Comparable sales during the complete quarter grew by 2% versus the prior year, and this was the first time since the second quarter of 2011 that J.C. Penney reported rising comparable sales.

Management highlighted the fact that the company is delivering improvements even in spite of the challenges affecting the industry over the past few months:

While 2013 brought a lot of change and challenges to J.C. Penney, the steady improvements in our business show that the company's turnaround is on track. In spite of the significant headwinds facing all retailers this season, including unprecedented harsh weather conditions in many parts of the country, we delivered on our promise to generate positive comparable store sales growth in the fourth quarter.

The company also announced that it now has more than $2 billion in excess liquidity, which is a positive sign when it comes to financial sustainability in the middle term.

On the other hand, Wall Street analysts think the company´s sales improvement is too small and comes too late: J.C. Penney received negative comments from Goldman Sachs, Deutsche Bank, and Sterne Agee on Tuesday, and the stock fell by almost 17% after the announcement.

The company has been facing stagnant sales and negative margins over the past few years. Management has implemented aggressive promotions to reinvigorate revenues lately, so profit margins most likely remained under heavy pressure during the holiday period. The company doesn't have much to show in terms of sales improvement, either, so things aren't looking good for J.C. Penney.

A dreaded competitive environment
Department stores are facing enormous challenges. Consumers are keeping their wallets closed, online retailers are rapidly gaining market share against bricks-and-mortar stores, and big discounts are becoming a necessity for those that want to protect their share of the pie under such conditions.

Sears Holdings' (SHLDQ) Sears stores have faced declining sales and falling profit margins in recent years, so the company´s problems can't be entirely blamed on industry conditions. However, Sears reported dismal sales performance during the holiday quarter, with comparable-store sales declining by a worrisome 7.4% versus the prior year.

Sears has turned to cost-cutting and inventory reductions to protect cash flows, but this seems to be hurting the shopping experience even more and aggravating problems on the sales front.

Kohl's (KSS 2.69%) hasn't provided specific information regarding performance during the holiday period. However, the company reported a 1.6% decline in comparable-store sales for the quarter ended on Nov. 2. Management is expecting comparable sales for the current quarter to be between flat and a 2% decline, so Kohl's isn't offering many reasons for optimism regarding the possibility of improving conditions for department stores.

Macy's (M -0.16%) is a different story, though: The company announced a better-than-expected performance during the holiday period, with comparable sales rising by 4.3% during November and December combined.

Management still made references to the questionable "macroeconomic environment with challenging weather in multiple states" affecting the sector, but the company seems to be sailing through the storm in a remarkably good shape. Macy's is most likely the exception that proves the rule, since most companies in the retail sector seem to be facing some truly heavy economic headwinds.

Turnarounds are always tough, and when the economic context isn't helping, they can become a challenge of enormous proportions. In that light, an investment in J.C. Penney is a materially risky proposition, considering the company's situation and competitive landscape.

Bottom line
A falling stock price doesn't necessarily mean an undervalued company, as the price needs to be compared against the company's fundamentals and business prospects to make sound investment decisions. J.C. Penney isn't showing signs of a sustainable turnaround at this stage, so an investment in the company seems to me like too much risk and uncertainty.