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J.C. Penney: Out of Intensive Care, Not Yet Out of the Woods

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J.C. Penney’s darkest days may finally be behind it – at least for now.

The mid-market department store retailer posted second quarter results Thursday that beat Wall Street expectations. Sales rose 5 percent to $2.8 billion from $2.66 billion from last year’s second quarter, beating consensus estimates of $2.7 billion. Same-store sales, or sales at established locations, rose by 6 percent. The retailer lost $172 million, or $0.56 per share ($0.75 excluding one-time items), handily beating analyst expectations of $0.96 per share, and last year’s devastating $586 million second-quarter loss.

“As we approach the completion of our turnaround, we are focused on reestablishing J.C. Penney as the premier shopping destination for the moderate consumer,” CEO Mike Ullman said in a statement, adding, “we expect to continue driving profitable sales this back-to-school season.”

The company has now turned in three consecutive quarters of positive same-store sales growth after nine quarters of negative comps, definitely putting it on the right track. Ullman, who resumed the CEO job after Ron Johnson was ousted in April 2013 after just 17 months on the job, has managed to undo most of his predecessor’s strategies by resuming its frequent discounting, coupons and promotions, thereby bringing back at least some of the shoppers it had alienated.

Also encouraging is the fact that much of the inventory left over from the botched Ron Johnson turnaround plan has been sold, with those hits on margin now having worked their way through the system.

In its conference call with analysts, management highlighted the positive trends in men’s and women’s apparel and accessories (with activewear a particularly strong category), beauty (Sephora is exceptionally strong), and the long-suffering home department.

Another key discussion point on the call was the fact that gross margin surged to 36 percent, from 29.6%. Though still well below the 41 percent and 39 percent reported by Macy’s and Kohl’s, respectively, this week, and an easy comparison to last year, the 640 basis point improvement was welcome news to investors.

Craig-Hallum Capital Group analyst Alex Fuhrman feels that e-commerce–currently about 10 percent of sales–could potentially become a drag on earnings as it becomes a larger part of the overall business due to the high costs of shipping and handling. He told CNBC that “as that business scales for years to come, you are looking at an incremental 10 to 15 basis point every year for the foreseeable future,” referring to the increased operating costs this business requires.

The stock rose 4 percent yesterday on the positive earnings news, to $9.74, but still remained 75 percent below the 2012 high.

Although these results indicate that JCP may be winning back some market share among middle-income consumers, the company has a long way to go to return to its dominance in the space. Between 2010 and 2014, JCP has seen its revenues plummet by $5.7 billion. In that same time period, Kohl’s sales have risen by $1.8 billion. Macy’s has added $4.4 billion to sales, largely by expanding its offerings of merchandise at opening price points that have taken market share from JCP.

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