Make or Break Time for J.C. Penney

The one question on every investor's mind in the retail sector is – Will J.C. Penney (JCPN.Q) survive? It's no secret that the holiday season, which falls in most companies' fourth quarters, is not only the most important period for any retailer but for struggling retailers, in particular. Unfortunately for J.C. Penney shareholders "struggling" would be a kind word to describe the retailer's recent performance. If the company can attract customers once again to its stores, shares in J.C. Penney may very well turn out to be the bargain of a lifetime. While increased foot traffic would benefit J.C. Penney across the board going forward, is it even possible for J.C. Penney to dig itself out of this deep hole and regain even part of its former glory?

Recalling what happened last year
A year ago, J.C. Penney stumbled in the fourth quarter, failing to meet expectations and turn things around. J.C. Penney blamed their disappointing results on the lack of sales and customers that they expected to be much higher than what was actually recorded. Revenue for the fourth quarter ended January 2013 fell 28.4% from the previous year to $3.88 billion. To make matters worse, J.C. Penney reported a net loss of $552 million, which equates to an EPS of negative $1.95 a share. Furthermore, comparable store sales declined by 31.7% from the fourth quarter of fiscal year 2012 with online retail sales also falling 34.4%. For its full year earnings for fiscal 2012, J.C. Penney brought in $12.98 billion in sales, but suffered a net loss of $985 million along with an EPS loss of $3.50 a share. Gross margin for fiscal 2012 also fell to 31.3% from 36% the year prior due to too many markdowns, items marked as clearance, and lack of sales.

J.C. Penney's senior management team assured investors that next year's results would be much better as the company planned to implement several turnaround strategies during the fiscal year 2013 to rebrand their image, launch a new marketing campaign, bring back once popular bands and establish new ones while ultimately seeking to drive customers back to its stores and website.

Expected performance in the holiday season
What is perhaps most encouraging for investors is the fact that EPS for the fourth quarter are expected to be negative $0.82 a share, still in the red but much better than last year's dismal performance. Revenue is estimated to be $3.86 billion, which if correct will mean that J.C. Penney basically stayed even in sales during the fourth quarter of fiscal 2013 when compared to the fourth quarter a year ago. After a rough sales year, analysts are predicting that J.C. Penney will post EPS of negative $6.11 a share with revenue of $11.93 billion for the full year. Hopefully, for investors, this does not turn out to be the case.

On a brighter note, J.C. Penney announced in its third quarter earnings report that its comparable store sales and gross margin are likely to improve over the next several quarters and within the years to come. The company is optimistic that its ongoing efforts to turn things around such as closing underperforming stores, enhancing the customer shopping experience, and launching new products will bring forth higher sales and more customers who will drive the gross margin back up. Unfortunately, for J.C. Penney, this past holiday season required retailers to discount more than in previous years, which most likely cost J.C. Penney much needed sales as such moves lead to a fall in gross margin and net profit.

The real problem
While it is possible that J.C. Penney could release better than expected earnings for the fourth quarter on Feb. 26, its results still will not fix the real problem at hand – sales per square foot within their stores. Since 2012, J.C. Penney's sales per square foot have dropped substantially from $154 in 2011 to $116 in 2012. The problem with this, other than the obvious fact that J.C. Penney has lost countless numbers of customers, is that each store has a certain number of fixed costs that must be covered for the business to survive. J.C. Penney could learn a thing or two from two of its department store rivals Macy's (M 2.09%) and Dillard's (DDS 0.63%) who have managed to uphold their sales per square foot despite current market trends of consumers acting more cautious, seeking the best price for the value, and ultimately, spending less on non-essential items.

Foolish takeaway
While hopes are high for the fourth quarter of FY 2013 at J.C. Penney, and management continues to state publicly that they expect their turnaround plans to yield positive results, Foolish investors shouldn't judge the success of these efforts on the company's fourth quarter results. Not only do Wall Street analysts expect the company to attract the same amount of sales that the company generated in the fourth quarter of fiscal 2012, but by the company's own admittance, sales results will be stationary at best. J.C. Penney's senior management's outlook for the coming year will likely be all the more important as sales results have yet to materialize.