It was a long, weary road to the bottom for J.C. Penney (JCPN.Q) investors, who've withstood the loss of three quarters of their stock's value over the last two years. It has managed to bounce off the depths of those lows with three straight quarters of consistently better numbers, and though it's by no means out of the woods yet, the department store retailer remains in significantly better shape today than it was at the start of the year.
Indeed, it's a turnaround story many investors are just waking up to after so long of tamped-down expectations from Wall Street, so here are three reasons J.C. Penney's stock could rise even further in the future.
Build on online sales growth
As much as Penney has been enjoying higher revenues overall, recording $2.8 billion in net sales in the second quarter on a 6% jump in comps, it's been the strength of the recovery in online sales from its jcp.com website that's been fueling the increase.
The site is witnessing increased traffic and average order value, and it is seeing an increasing number of sales originate from within the physical stores themselves. If a customer can't find what they're looking for on the floor, employees can help them find it on the company website and place the order for them on handheld devices they carry.
Department store retailer will need an Internet cop soon with all the traffic its website's been getting. Data: J.C. Penney quarterly SEC filings.
Admittedly, the gains look a lot better than they otherwise might because of how bad things had been. When you're losing 25% to 40% of your sales every quarter, any upturn is going to look good, if not great.
But there's still plenty of room for expansion. Just 30% of its online business is completed as an in-store pickup, but by building out its capabilities to allow for same-day pickup, it can drive even more sales online.
Get home goods to grow
If there was one area that's been consistently weak for Penney it is its home store, and even today, it's still a work in progress. The retailer doesn't typically break out sales from this division, but last quarter, management noted it jumped 25% over the prior year's performance.
Basically, the department had been chock-full of clearance items it needed to eliminate, particularly of furniture, a situation that still exists today. However, clearance overall is a much smaller percentage of total sales than it's been in the past, so while the home store still dominates that category, it's actually a much smaller component.
Gaining hold of clearance sales in the home store has been key to improving margins. Source: J.C. Penney.
Clearance is now running at its historic rate of below 15% of sales, and clearance sales fell by $125 million in the quarter from the same quarter in 2013. Management says it's not trying to get down to zero clearance, just to stay within the historical norms, which is what it has accomplished.
Coupled with other initiatives it's developing to improve the business, Penney believes the home store can come back strong. Even in the months when it was going up against a relaunch of the department, a time when you'd expect performance to be weak because of the fanfare that would surround the effort, it saw higher comps.
Traffic turns positive
There's no way around it: Store traffic at Penney remains negative, and for real growth to be achieved, it's going to have to get it to turn positive.
Things were better in the second quarter than they were in the first, and they were driven higher by women's and men's apparel, it's two largest businesses. And it's not like it was alone in the predicament, as both Macy's (M -2.03%) and Kohl's (KSS -2.45%) reported difficulties, too.
But in contrast to its rivals, Penney finds itself in a better position. Last year, as traffic was falling, its sales actually plunged more, so now as traffic begins to normalize again, it's seeing its conversion rate rise.
Conversion is a measure of how many customers who visit a store end up buying something. So, as Penney is going through this turnaround, even though traffic might be negative, it's seeing positive conversion. In fact, conversion, average transaction size, and average unit retail for the quarter were all higher compared to last year.
When traffic finally does turn positive, Penney ought to have even better sales numbers to report.
Foolish investment takeaway
Of course, there's no guarantee J.C. Penney's plans will play out as anticipated. And it's gotten a lot of mileage out of the fact that expectations for it to survive -- let alone recover -- were so low. Many analysts thought we had seen Penney's last days as a retailer and were only waiting for the music to stop before it was called out.
So far, though, Penney has proved the pessimists wrong by responding to its customers' criticisms and undoing most of the changes they abhorred. It's still in the process of building up consumer trust but has made vast strides from before. I think it's likely it will continue on that path, and even though J.C. Penney's stock is 22% higher than where it started 2014 , I believe investors still have the opportunity to get in and reap even greater gains.
