Jcp
Image source: J.C. Penney.

Discount retailer J.C. Penney (NYSE: JCP) has had to deal with tough conditions in the retail industry for years, and it has struggled to find its way through a series of second-guessed strategic shifts. Yet even before the company's release of its fiscal third-quarter report on Friday, J.C. Penney preannounced comparable-store sales figures that were above what most investors were expecting to see -- and said that its earnings would also be better than previously forecast.

The stock didn't react favorably to the news, though, especially as rival Macy's (NYSE:M) saw its stock get pummeled after its own poor earnings report, and skeptical investors have to wonder whether the magnitude of Penney's earnings beat will make any significant difference in the long-term trajectory of its turnaround. Let's take an early look at what's been happening with J.C. Penney in recent months and whether it's poised to enter the holiday season on a positive note.

Stats on J.C. Penney

Analyst EPS Estimate

($0.56)

Year-Ago EPS

($0.77)

Revenue Estimate

$2.87 billion

Change From Year-Ago Revenue

4%

Earnings Beats in Past 4 Quarters

3

Source: Yahoo! Finance.

Will J.C. Penney earnings help send the stock higher?
Investors have generally gotten more optimistic about Penney's earnings prospects over the past couple of years, cutting their loss expectations for the current fiscal year by a nickel per share and narrowing their loss prediction for next year by nearly a dime. The stock hasn't done much, though, rising about 4% since early August.

J.C. Penney's fiscal second-quarter report in August gave investors some hope that the retailer might pull off a turnaround. Same-store sales growth accelerated to 4.1%, and better margins helped Penney narrow its losses by about 20% from the previous year's quarter. Moreover, the company's cost reductions continued to grow, helping to boost the bottom line and demonstrating the success of its restructuring efforts. As a result, Penney earned a bond-rating upgrade from one agency from CCC to B-, and while that's still firmly in junk bond territory, it's nevertheless a key milestone in demonstrating its ability to improve its financial condition.

Some of the measures Penney has taken have created concern among investors that the company is doing too much. In late October, the retailer said it would cut 9% of its staff at its headquarters in Texas, joining many of its retail peers with deep layoffs. The stock gave up some of its gains after that move as confirmation of the severity of Penney's troubles once again sank in.

That hesitancy among shareholders showed itself again Wednesday, as Penney preannounced that same-store sales for the third quarter rose 6.4%, faster than the consensus forecast among investors for 5.7% growth in comps. CEO Marvin Ellison also said that the company would report "gross margin and earnings performance that exceeded our expectations," without going into detail on exactly what those numbers would be.

Yet what likely kept the stock from celebrating rising comps was the terrible quarter  Macy's had. The rival retailer saw its shares plunge as much as 15% after reporting a 6% drop in revenue that cut net income by more than 45%. Macy's also slashed its full-year earnings guidance by $0.50 per share, or about 10%, and predicted that its full-year comps would be down by around 2% compared to earlier predictions for break-even performance. It's possible Macy's loss will be Penney's gain, but many worry that the same overall industry factors holding Macy's back will affect Penney as well.

In J.C. Penney's earnings report, investors need to look closely to see how things are shaping up for the key holiday quarter. If overhangs of inventory are already predicting massive discounting activity to get merchandise out the door, then even a big boost in sales won't necessarily keep J.C. Penney moving on the path toward profitability. Only if the retailer can stick to its guns and emphasize its strengths will Penney truly keep its turnaround on track for long-term success.

Dan Caplinger has no position in any stocks mentioned. 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.