J.C. Penney Just Bought Itself More Time

J.C. Penney's better-than-expected quarter has some investors excited. Source: J.C. Penney.

J.C. Penney (NYSE:JCP) may have just bought itself more time, but it's not out of the woods yet.

To its credit, shares spiked more than 20% after the bell yesterday after the beleaguered retailer released encouraging first-quarter results. Of course, last year's dismal first quarter didn't exactly set a high bar, but same-store sales did grow by 6.2% -- better than J.C. Penney's expected 3% to 5% increase -- which helped quarterly sales rise 6% year over year to $2.8 billion.

Meanwhile, J.C. Penney's operating loss improved by 49.2% over last year to "just" $247 million, and its net loss came to $352 million, or $1.15 per share. Analysts, on average, were expecting an even wider loss of $1.25 per share on sales of $2.71 billion.

Liquidity crisis averted... for now
Gross margin also improved by 230 basis points to 33.1% over the same year-ago period, and is still expected to "improve significantly" over last year -- again, not a particularly difficult comparison. Combined with its stabilization in sales, though, J.C. Penney's free cash flow is now expected to be breakeven in 2014. Finally, liquidity is still expected to be in excess of $2 billion at year-end.

Then again, that's unsurprising when you consider J.C. Penney also announced that, sometime in the second quarter, it will close on a new $2.35 billion senior secured credit facility to replace its existing $1.85 billion bank line. J.C. Penney explained that the new facility extends the old April 2016 maturity by several years, is expected to provide better pricing terms, and should add $500 million of incremental liquidity to appease its seasonal needs. 

Also, if it isn't happening already, J.C. Penney should soon enjoy the positive effects of its strategic initiative announced in January to eliminate roughly 2,000 jobs by shuttering 33 locations. However difficult that decision was to make, we were bound to see some added improvement without that small, disproportionately underperforming group dragging down J.C. Penney's remaining store base.

What's an investor to do?
On the surface, there seems to be a lot to like about yesterday's report. But to be honest, I'm still struggling to put aside the fact that J.C. Penney is still losing boatloads of money.

Sure, it lost less on a per-share basis than last year. But only because it forced existing stockholders to endure significant dilution by selling 84 million new shares last September. With every passing quarter still tacking on hundreds of millions in fresh losses, J.C. Penney's $5 billion-plus debt pile only grows that much more unmanageable.

What's more, while J.C. Penney showed modest improvement this quarter, again it was pitted against the backdrop of last year's terrible Q1, which included $72 million in charges related to restructuring and the ouster of CEO Ron Johnson.

For now, J.C. Penney's progress just isn't significant enough to get me excited about the stock over the long term. It may well continue to narrow its losses from here, but J.C. Penney is still a far cry from achieving sustained profitability anytime soon.