J.C. Penney (NYSE:JCP) shares went through the roof yesterday, climbing over 20% after the struggling retailer reported surprisingly strong comparable sales for November and December. J.C. Penney said the key metric improved 3.7% during the crucial holiday season, better than many analysts had expected after the company reported flat comps in the third quarter.
Outgoing CEO Mike Ullman credited the "warrior spirit" of his sales associates for the strong performance, among other things, and said, "Customers clearly responded to our combination of great merchandise and compelling promotions this holiday season." As a result of the performance, management said it now expects to report same-store sales for the fourth quarter, which ends in January, at the high end of its previously announced range of 2-4%.
While J.C. Penney's results are certainly encouraging, they still leave investors with a number of questions. Most importantly, we don't know the company's gross margin during the period. Same-store sales can be artificially inflated with promotions, which help drive revenue, but hurt the bottom line. As the company was the first major retailer to report comparable sales for the holiday period, we also don't know if the increase owes to a strong performance by the department-store industry across the board or if Penney was able to grab share from its rivals. Macy's and Kohl's shares were up 4% on the day, indicating investors believe sales were strong throughout the industry.
Not out of the woods yet
While a 3.7% comparable sales increase would be impressive for most department stores, J.C. Penney is not your average retailer. The company lost nearly $1.4 billion in 2013 and almost $1 billion the year before that, and free cash flow was worse than $3 billion for the two years combined. Results have improved since Ullman replaced former CEO Ron Johnson in the middle of 2013, but the company is still on track for a loss of more than $500 million this year.
Ullman has shored up the company's cash position, with $1.9 billion in liquidity as of its latest quarterly report, but debt has also jumped to $5.3 billion.
The losses from Johnson's tenure still far outweigh the work that Ullman has done to rebuild sales and profitability as the chart below shows.
Despite those recent gains, J.C. Penney's comparable sales over three years are still down a whopping 28.5%. That means each store has lost nearly a third of its sales from 2011, and Penney wasn't exactly doing gangbusters back then. That year, sales fell by 3% and profit dropped by more than half to $207 million. The company's struggles convinced the board to bring in a creative thinker like Ron Johnson. Though that decision backfired, the need for change was understandable.
Even if J.C. Penney eliminated its self-inflicted problems, it would still face several challenges including the rise of e-commerce and cutthroat competition from Macy's and other department store chains. Real estate is also an issue. Many of the company's flailing stores are located in aging malls that are losing traffic. Traditional mall anchors such as J.C. Penney and Sears have become anathema to real estate investment firms and are at the center of many dying malls. This morning, Penney announced it would close 40 stores, or nearly 4% of its base.
The trend also seems to be indicative of Penney's aging customer. This is not a brand that's trying to come back by winning over millennials.
That all means that Marvin Ellison, the current Executive VicePresident of Home Depot's U.S. stores, may have the hardest job in retail when he takes the helm on August 1. Ellison is a respected leader in retail, having spent 15 years at Target before his 12 years at Home Depot, and is considered an operations wizard but lacks substantial merchandising experience, which could be key for an effective turnaround.
With the successful holiday season and sufficient liquidity arrangements in place, J.C. Penney has proven it can tread water, but it will need to reinvent itself in order to return to profitability and find long-term success. With mounting losses and debt and a poor real estate portfolio, that may prove too big a challenge for even the brightest minds in retail.
Jeremy Bowman has no position in any stocks mentioned. The Motley Fool recommends Home Depot. 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.