Shares of J. C. Penney (NYSE:JCP) have almost doubled from the lows reached in February on excitement that the multi-year turnaround effort at the company may finally be getting some traction. The results have been positive, with first quarter comparable sales growth of 6.2% and margin improvement of 230 basis points. In a retail environment where competitors including Macy's (NYSE:M), Kohl's (NYSE:KSS), and Target (NYSE:TGT) have reported declines in comparable sales, these results certainly do seem encouraging.

However, taking a step back and looking at the past several years shows just how much J. C. Penney needs to catch up with the competition.

Revenue still lags
While top line growth in the first quarter is a step in the right direction, the five year growth chart for J. C. Penney and a sample of competitors tells a much more complete story:

JCP Revenue (Annual) Chart

JCP Revenue (Annual) data by YCharts

It is important to consider the company's history to appreciate just how dramatic this decline has been; 6.2% comparable sales growth is only small progress toward getting J. C. Penney back to where it was five years ago. 

Same story with profitability
To drive home the point of just how far J. C. Penney has fallen, any number of measures of profitability growth tell a similar story, such as the following depiction of earnings-per-share growth:

JCP EPS Diluted (Annual) Chart

JCP EPS Diluted (Annual) data by YCharts

J. C. Penney generated EPS of $1.57 in 2010, which has steadily eroded each year through 2013 when the company reported a loss per share of $(5.57) in 2013. Free cash flow suffered a comparable decline over the same period.

Heavy debt balance weighs on recovery
In addition to reinforcing just how far J. C. Penney needs to climb to reach the same sales and profitability numbers that it reported five years ago, there is another piece of the turnaround plan that needs to be put into context. To survive a prolonged period of negative earnings and free cash flow, J. C. Penney has issued debt at a time when many of its peers have been slowly de-leveraging:

JCP Total Long Term Debt (Annual) Chart

JCP Total Long Term Debt (Annual) data by YCharts

As of the most recent quarter, J. C. Penney has total debt (including capital leases) of $5.6 billion, which translates into a debt-to-equity ratio of over 2.0. In addition to being the highest of the peer group depicted above, this has several strategic ramifications. First, higher debt levels will make it more difficult (and more expensive via higher interest rates) to adequately fund growth initiatives. Second, the combination of elevated debt and negative free cash flow take away the standard options of returning value to shareholders.

In contrast, Macy's most recent earnings release was accompanied with news of a 25% dividend increase and a $1.5 billion increase in the company's share buyback program. Macy's, Kohl's, and Target are just three of many retailers with consistent dividend payments yielding 2% or more. 

So what is working for J. C. Penney?

Sephora inside J. C. Penney-Source:

While there is certainly a long road ahead, J. C. Penney is in fact driving a number of changes that are yielding positive results. Exclusive brands such as Liz Claiborne, continued investment in private brands such as St. John's Bay, and the continued expansion of Sephora Inside J. C. Penney locations are all performing solidly. The recent revamp of J. C. Penney's home store strategy has the potential to provide further upside. On the expense side, plans to drive operational efficiencies are showing meaningful results as reflected by the $69 million (6.4%) decline in SG&A expenses compared to the first quarter of 2013.

In addition to operational improvements, there is another key reason for investors to give the turnaround at J. C. Penney a thorough look: valuation. J. C. Penney's struggles over the past few years have placed the company at a compelling valuation on a price-to-sales basis:

 TTM P/S Ratio
JCP 0.2
M 0.7
TGT 0.5
KSS 0.6

If J. C. Penney were able to return to industry standards for profitability and growth, the price-to-sales ratio would seem to indicate that shares have the ability to triple in order to fall within the peer group.

Turnaround is not guaranteed
The logic that J. C. Penney is wildly underpriced on a price-to-sales basis has a big "if" attached to it; for shares to provide outsized returns for investors, the turnaround plan needs to succeed and J. C. Penney must approach the margins of the peer group. There are drivers ranging from Liz Claiborne and Sephora that can help fuel a recovery, but success is by no means guaranteed.

J. C. Penney operates in a highly competitive environment that is currently facing some consumer spending headwinds. Industry leaders such as Macy's are in a much stronger financial position, which will make J. C. Penney's attempts to regain market share an uphill battle. As a result, there are plenty of risks that might limit J. C. Penney's recovery even if the company executes its strategic plans. 

Foolish Takeaway
Rather than rolling the dice on a bet that J. C. Penney can execute its turnaround, investors can achieve a high probability of market-beating returns by focusing on best-in-class retailers such as Costco Wholesale, which is generating strong growth without the baggage of a rocky five year decline and an uncertain future.