What a difference a year (or two) makes! Last Thursday, J.C. Penney (JCPN.Q) reported better-than-expected first-quarter results including a second straight quarter of comparable-store sales growth. As a result, shares rallied 16% on Friday, reaching levels not seen since Thanksgiving.
J.C. Penney 1-Year Stock Chart, data by YCharts
As long as J.C. Penney continues to post comparable-store sales growth, shares could continue to rally. However, while this might make J.C. Penney a good stock for speculators, it is by no means a good "investment."
J.C. Penney is still consistently losing money and burning cash. It would need to repeat last quarter's sales growth for about a dozen more quarters to start generating a return above its cost of capital (the key measure of whether a business is creating value). For these reasons, Macy's (M -1.28%) is a far better bet for long-term investors among mid-price department stores.
It's all about perspective
Two years ago this month, J.C. Penney reported its Q1 2012 earnings results. That was the first quarter under former CEO Ron Johnson's radical new strategy, which involved lower everyday prices and month-long promotions rather than frequent sales and coupons.
The results were shockingly awful. Comparable-store sales plummeted 18.9% year over year, and total sales fell 20.1% to $3.15 billion, leading to an adjusted loss of $55 million. J.C. Penney shares suffered their biggest daily percentage drop in history following the earnings release, and analysts began to question Johnson's strategy for the first time in his brief tenure as CEO.
Compare that to J.C. Penney's Q1 results announced last week. Revenue totaled $2.8 billion, down 11% from the terrible results of two years earlier. Meanwhile, J.C. Penney posted a net loss of $352 million -- many times higher than the loss incurred in the same quarter two years ago.
J.C. Penney's sales and earnings results are worse today than in the first year of the Ron Johnson era.
Today, many analysts feel at least "cautiously optimistic" following J.C. Penney's most recent results. Popular TV personality Jim Cramer went further on Friday, pointing to J.C. Penney's 6.2% comparable-store sales growth and declaring its turnaround a success.
The difference is one of perspective. J.C. Penney's performance last quarter was objectively terrible. However, it still compared favorably to Q1 2013, when most J.C. Penney stores were in the middle of disruptive renovations and sales plummeted 16.4%: a truly disastrous result, considering that it came on top of a 20% sales decline in Q1 2012. For J.C. Penney, "less bad" seems really good right now.
Macy's is actually making money
Unlike J.C. Penney, Macy's posted a comparable-store sales decline last quarter. At a superficial level, this makes it seem like J.C. Penney is in better shape because it has positive momentum. However, Macy's still expects comparable-store sales growth of 2.5% to 3% this year, supporting continued earnings growth. Most important, Macy's is solidly profitable.
Macy's is in much better shape than J.C. Penney.
Furthermore, looking back two years, Macy's earned $0.43 per share on sales of $6.14 billion in Q1 2012. Whereas J.C. Penney's revenue is down double-digits and its net loss has ballooned compared to the first quarter of Ron Johnson's failed strategy, Macy's Q1 revenue is up 2% and EPS is up 40% in the same time period.
Foolish bottom line
The reason that J.C. Penney is posting better sales growth numbers than Macy's right now is that it performed so dreadfully last year, creating really easy comparisons. There is no guarantee that J.C. Penney will be able to sustain its current rate of sales growth once it starts to run up against stronger comparisons.
Even at the current growth rate, it would take several more years for J.C. Penney to approach its 2011 sales level. Moreover, while the company hopes to reach breakeven on a cash flow basis this year, there is a good chance it will fall short of that goal. J.C. Penney is also years away from reaching breakeven on a GAAP basis.
There's really no way to know for sure whether J.C. Penney will make it back to consistent profitability, how high its profit margin could be, or how long it might take to make a full recovery. This makes J.C. Penney stock highly speculative. By contrast, Macy's makes money every quarter and always posts solid (if not spectacular) results. This makes Macy's a much safer bet -- and a better long-term investment opportunity.
