Are J.C. Penney Expectations Unsustainable?


After updating its October turnaround progress, the market cheered J.C. Penney , boosting its stock more than 5% as same-store sales finally moved into positive territory. Wall Street, however, was far more sanguine, with even the Fool's Rick Munarriz skeptically raising both eyebrows that the news was anything more than putting lipstick on a pig.

In the update, the troubled department store chain said same-store sales rose 0.9% in October, the first month since December 2011 that the important retail metric was in positive territory. While my colleague's point was that the inclusion of online sales in Penney's comps minimizes whatever positive message may have been otherwise conveyed, I think the critique misses the larger issue that since the company has reported them that way for some time (since 2008, in fact), the numbers are finally moving in the right direction regardless. In August they were down almost 10%; in September, 4%.

Now they've crossed over into the black, and though Penney also said average unit retail and overall traffic fell below last year's levels, its average transaction value and units per transaction were higher in October than they were last year.

OK, let's put some more caveats out there. The retailer returned to its planned promotional activity that its former CEO had eliminated in favor of an everyday-low-pricing strategy, and also had to clear out some leftover inventory, meaning it was discounting more items. Yet despite those factors, gross margins were the highest margins seen this quarter.

The growth in its home furnishings business was particularly strong, representing about half the growth the online channel enjoyed. Whereas critics contend that's not a strong base to grow on, furnishings has always played a large part in Penney's sales, more than one-fifth of its revenues -- just as large as women's apparel -- before the entire operation ran off the rails.

It's been a bigger part of its business than furnishings are at Macy's or Kohl's, where they represent about 15% and 18% of revenues, respectively, or at Dillard's, where they were just 7% or 8% of sales. If home furnishings at Penney's are getting back on track, then I'm hopeful the rest of the business will follow along too.

While I've turned from a Penney's critic into a believer, I think it needs to be careful to not trumpet success before it's due. CEO Myron Ullman assuring investors the retailer didn't need to raise capital this year one day before it actually did just that ruins the company's credibility. If it's putting out a press release trumpeting the turnaround is gaining traction two weeks before earnings will show it isn't, that's going to leave it in tatters.

Time is not on Penney's side. While the money it brought in gives it breathing space, it can't keep burning cash the way it has, so it really needs for the changes it's made to grab hold. I think they are doing just that.

Ullman's been telling everyone sales would return this quarter, and it seems they are, but considering they were down for the first half of this period, the fact that they've rebounded now means the turnaround is doing better heading into the fourth quarter. Let the critics and Wall Street pros fulminate; I think we're witness to the beginning of a self-sustaining growth story again.

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Fool contributor Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of Dillard's. 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.

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