If you want evidence of how misleading small same-store sales increases can be touted for an otherwise money-losing and failing business, take a walk down memory lane and head on over to Blockbuster Video. In early 2009 Blockbuster Video touted a quarterly and even full year same-store sales increase . Hurray! Alas, just one year later it filed bankruptcy. While J.C. Penney (NYSE:JCP) probably has far better hopes than Blockbuster Video had, the lesson is still the same -- don't be too quick to jump to the conclusion that a turnaround is in place when positive same-store sales are touted. .
The Blockbuster Video details
On March 19, 2009, Blockbuster reported its fiscal fourth-quarter and full-year results. Same-store sales jumped 6.4% for the year ending Jan. 4, 2009, a hair higher than the much-celebrated 6.2% improvement in J.C. Penney's most recent quarter. Both rentals and product sales saw healthy-looking gains.
For Blockbuster, it was the fourth quarter in a row of positive same-store sales gains. Blockbuster even managed to report a decent "adjusted" net income. Michael Pachter, an analyst with Wedbush Morgan at the time, stated, "The sell-off in the stock due to recent rumors on a Blockbuster bankruptcy was overdone as we continue to believe that the company is not currently at risk of entering bankruptcy."
Long story short, Blockbuster filed for bankruptcy a year later. The same-store sales "gains" were just small bounces in comparison with already-decimated revenue. Product sales were up because the company slashed prices on previously written-down inventory and sold it on the cheap.
It reminds me at least a little of J.C. Penney.
The not-so-blockbuster results
J.C. Penney reported fiscal first-quarter results on May 15. Revenue rose 6.1% to $2.8 billion. Same-store sales jumped 6.4%. That's about where most of the "good news" ends, as there were so many problems with these turnaround figures I don't know where to begin.
First, the comparable quarter for J.C. Penney included a 16.4% drop in revenue and a 16.6% plunge in same-store sales. The improvements are better than further declines, but they're slight improvements from very depressed levels. For example, in the first quarter of 2012, J.C. Penney's revenue was $3.152 billion so its most recent quarterly revenue remained significantly below even that. The 2012 quarter wasn't even anything to write home about in the first place since J.C. Penney lost $163 million in that quarter alone.
Second, speaking of losses, the most recent operating loss shown by this report was a staggering $247 million. Sure, it was a 49.2% improvement, but that's still quite a lot of bloodshed and leaves the company with a long way to go.
Next, J.C. Penney listed "Women`s and Men`s apparel" first on its list of top performing divisions. If you take J.C. Penney at its word, that may have been a result of the unusually cold temperatures. Recall back on the conference call in November, Mike Ullman, CEO of J.C. Penney, stated, "Women's apparel, men's apparel, and fine jewelry were some of the top performers in the quarter, especially in seasonal categories as the weather turned colder." We didn't exactly have a heat wave either in the first quarter of this year. J.C. Penney probably sold a lot more boots, jackets, gloves, sweaters, and scarves then too than it would have normally.
Finally, last but not least, two phrases popped up in the release that brought back more Blockbuster memories: The phrases "negatively affected by an increase in clearance sales" and "negative clearance margins." This means sales benefited from selling merchandise for less than the company paid for it. That's not exactly a bragging point. I can sell $100 bills for $90 all day long too.
Foolish final thoughts
I'm not saying that a turnaround isn't possible. The intention of using Blockbuster as a counter-example is just to illustrate that "less bad" numbers aren't enough evidence of a solid recovery in a failing business, especially with so many surrounding circumstances such as sales of inventory at a loss that give the illusion of sales improving more than they actually are. The next year will probably ultimately tell the tale, and in this Fool's opinion the jury is still out and it could go either way. If J.C. Penney really does successfully reinvent itself back into a blockbuster, I'd rather be late to that party then take the risk sooner as it could become the next Blockbuster Video.