Shares of J.C. Penney (JCPN.Q) were surging again today, up as much as 10% after getting an upgrade from Citigroup. Lifting his rating from neutral to buy, analyst Oliver Chen said same-store sales can continue to rise at 5% as the company eliminates unwanted merchandise, gets back to its private-label products, and streamlines its business following the ouster of former CEO Ron Johnson. Chen also believes liquidity concerns about the department store chain are overblown and said it should have as much as $2 billion in liquidity by the end of this year.
Investors clearly bought into Chen's thesis, sending the stock above $9 for the first time this year as shares have nearly doubled since its earnings report came out just two weeks ago. Is J.C. Penney really back? Chen argued that the company's Q4 2% same-store sales gain "bodes well" for its 2014 performance, but taking a longer view of same-store sales shows how meaningless the 2% sales gain was after 2012's debacle. The chart below shows J.C. Penney's same-store sales for the past two years.
As you can see from the chart, same-store sales consistently improved in 2013 up to the point where it swung into positive territory in the fourth quarter, but much of the reason for that was that those comps were lapping increasingly worse numbers in 2012. Looking at the same-store sales figures over a two-year period, then, the fourth quarter was not even the strongest quarter, coming in second to the third quarter, and two-year comps in all four quarters fell roughly 30%.
Given that sharp decline, growing same-store sales by 5% this year will not be nearly enough to bring the company close to profitability. In fact, that would still give the company a three-year comp of worse than -27%. Before Johnson took over in November 2011, revenue had already flatlined, and Penney actually reported a net loss in 2011. So while Ullman's strategy may be a path toward stability, it doesn't look like a recipe for long-term success.
J.C. Penney is far from the only struggling retailer these days. Companies like Staples and RadioShack recently saw their shares plummet after posting dismal fourth-quarter earnings reports and sizable comparable-sales declines. In a way, J.C. Penney has an advantage over these businesses. Office supply and electronics sales are fading from the brick-and-mortar arena and flocking online, but clothing is a different animal, much more likely to drive in-store purchasing, and some department stores are thriving. Macy's, for example, hit another 52-week high today, and shares are up nearly 50% in the last year, helped to a large extent by J.C. Penney's woes. That may encourage Penney bulls, showing that the model isn't broken, just the business. And it may be easy to get excited about a comeback following Chen's endorsement, but it's hard to downplay the hole Penney's dug for itself. After all, this is a company that just completed a year with a nearly $1.4 billion net loss. A single-digit improvement in same-store sales is not going to be enough to solve that problem.