J.C. Penney Bounces Back! (But Don't Get Too Excited)

J.C. Penney Bounces Back! (But Don't Get Too Excited)

It's been a long road for J.C. Penney and it looks like there's still a long way left to travel. The troubled retailer reported third-quarter results earlier today, and things look better, but not good. There was a hint of success, as the chain managed to make more per share than the market expected, and the stock bounced in early trading. But fundamental sales issues still exist, and J.C. Penney still needs to get its house in order if it wants to make a real turnaround.

Hitting the bottom and readying for a bounce
Comparable-store sales -- a key metric for retailers -- finally started to show some strength. The business still had a year-over-year fall, but by October, sales had started to turn positive. That might mean that J.C. Penney has finally found the bottom of its sales slump. Clearly, one month doesn't make a trend, but it's a good sign nonetheless.

A turn in sales isn't everything, though. If you're just selling goods at a loss in order to generate more dollars up front, then you can't sustain the growth for any amount of time. J.C. Penney has yet to overcome this hurdle, and gross margin fell in the third quarter compared to the same period last year. Management said that margin did improve sequentially as the quarter went on, but it's not clear if that means the business is on its way to a healthy margin yet.

The problem with J.C. Penney
J.C. Penney isn't out of the woods because it doesn't have a strong customer base yet. The return to sales growth is just the beginning of a long process of winning back customers. Quarterly revenue is still down 35% from the same period in 2008. People just aren't spending money with J.C. Penney like they used to.

A lot of that may be due to the havoc that former CEO Ron Johnson wreaked in his short time with the business. His ill-fated attempt to make the stores into hip shopping zones -- something they're simply not -- was met with skepticism and a hasty customer retreat. Now that Myron Ullman is back as CEO, the company has a chance to return to its roots and reconnect with its core customers.

The money problem
Ullman seems to have started a meaningful turnaround to the company's cash flow problem. Last year, the company had a free cash flow loss -- cash left over after investing in the business -- of $584 million. This year, the company had some money to play with, increasing free cash flow to positive $49 million.

It remains to be seen if Ullman can use that money to make J.C. Penney even a dim reflection of its former glory. Right now, the business is still in a bad place. It's not as bad as it used to be, but one good quarter isn't going to be enough to salvage this company -- one good year might not be enough, either. Keep an eye on the company's cash, comparable sales, and margins. Ullman's got his work cut out for him, but it's not an impossible task.

Cash winners
J.C. Penney is just now figuring out how to manage its cash flow, while other companies break new ground. To learn about two retailers with especially good prospects, take a look at The Motley Fool's special free report: "The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform and how they're planning to ride the waves of retail's changing tide. You can access it by clicking here.

The article J.C. Penney Bounces Back! (But Don't Get Too Excited) originally appeared on Fool.com.

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Originally published