J.C. Penney (NYSE:JCP) might just have turned a crucial corner.
The ailing department store, which has been losing business to rival companies such as Macy's (NYSE:M) and Kohl's (NYSE:KSS) over the last three years, reported decent first-quarter results in May that may hint at a much-awaited turnaround at the retailer and raises hopes for its second-quarter results release.
While J.C. Penney's earnings release contained both positive and not-so-positive bits of information, the first quarter of 2014 was clearly a milestone for a company that experienced a consistent erosion of its sales base since 2011.
J.C. Penney caused a lot of headaches for shareholders and customers alike over the last couple of years. Ron Johnson, a former senior vice president of Retail Operations at Apple, was hired in 2011 in order to bring much-needed change to the retailer.
Mike Ullman, former Chief Executive Officer of J.C. Penney, seasoned executive and predecessor (and successor) of Ron Johnson, has relied too heavily on promotional activities in the past to increase store traffic, which cut deep into profit margins.
Ron Johnson was just about to change that promotion-centric strategy by redefining J.C. Penney's brand image. Getting Ron Johnson to sign on with J.C. Penney caused a surge in investor confidence at the time and revived hopes that J.C. Penney could indeed be turned around quickly.
Unfortunately, it didn't work out that well. Ron Johnson's new store concept and, more importantly, the cancellation of promotional offers deeply alienated shoppers and resulted in serious sales declines over the ensuing two years. J.C. Penney shoppers were usually middle-class buyers looking for a bargain who then decided, well, to shop somewhere else.
J.C. Penney's revenues declined from $17.3 billion for the full year in 2011 to $11.9 billion for the full-year 2013 -- a decline of 31% in total sales over just a two-year period. In 2013 alone, J.C. Penney's total sales declined 8.7%. The retailer also reported many quarters of sequential sales declines on a comparable same-store basis, which ultimately led the company to pursue a secondary offering to shore up its balance sheet.
In order to stabilize the company and shore up its finances, J.C. Penney rehired its former Chief Executive Officer Mike Ullman in 2013, who then conducted a secondary offering in September 2013.
The offering brought approximately $800 million of cash into the company. Right about that time, investors lost all hope in J.C. Penney, and shares were literally thrown under the bus.
Shares of the struggling retailer had already declined 70% since the beginning of 2012, and investors clearly didn't believe in J.C. Penney's turnaround. Investor pessimism ultimately peaked at the beginning of February 2014 as investors expected dismal fourth-quarter results and prepared themselves for another disaster quarter. Only to be disappointed.
At the end of February 2014, J.C. Penney reported a solid increase in comparable same-store sales of 2% for the fourth quarter of 2013. In addition, J.C. Penney surprised investors with an upbeat guidance for the remainder of the year and projected first-quarter comparable same-store sales of 3%-5%.
Investors clearly were caught on the wrong foot as shares surged 43% from February 24-27, 2014.
First-quarter results highlighted continued sales momentum
Investors were now looking forward to J.C. Penney's first-quarter results, with expectations largely on the negative side.
However, J.C. Penney blew the lid off with its release.
With comparable-store sales growth of 6.2% year over year, the retailer surprised both analysts and investors. While first-quarter results still reflected a net loss of $1.15 per share compared to last year's $1.58, the focus was on J.C. Penney being able to stop the sales bleeding.
More importantly, J.C. Penney achieved strong sales growth in a difficult retail environment, one in which many other retailers were affected by unusually adverse weather conditions during the winter months.
This has indeed been a spectacular quarter for J.C. Penney, particularly considering that its competitors didn't do so well at all: Kohl's, for instance, reported first-quarter comparable-store sales of minus 3.4%, while analysts expected positive sales growth of 0.2% and Macy's reported a decline in comps of 1.6%.
Both retailers, however, remained upbeat for the remainder of the year and mentioned bad weather affecting first-quarter business results.
Despite the better performance of J.C. Penney, a look at key valuation metrics, such as their respective P/S ratios, suggests that the market judges retailers Macy's and Kohl's to have much better sales prospects than J.C. Penney.
The market currently values every dollar of J.C. Penney's sales revenue at only $0.21, whereas both Macy's and Kohl's trade at substantially higher forward sales multiples.
The vastly different valuation multiples highlight that the market continues to be extremely pessimistic toward J.C. Penney, even though the company has delivered much better first-quarter results and certainly has potential to deliver further surprises down the road.
For the time being, it looks as though shoppers are returning to J.C. Penney and the retailer is gaining ground. With two crucial, sequential quarters of positive comparable same-store sales growth, it surely looks as if J.C. Penney has turned a corner.
The successful common stock offering last year certainly contributed to injecting (besides cash) a bit more confidence into the retail company. If J.C. Penney can sustain its sales momentum in the second quarter 2014 and prove skeptical investors wrong with respect to its sales performance, J.C. Penney might just end up one of the most impressive retail turnarounds in history.
Kingkarn Amjaroen owns shares of J.C. Penney Company. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.