J.C. Penney Still Has a Lot to Prove

J.C. Penney may be posting positive comps again, but it's too soon to read too much into the busier registers. 

The struggling department store chain turned heads after yesterday's market close by announcing that comps rose an impressive 10.1% in November. This follows surprisingly positive comps in October. Comparable-store sales had been negative since the end of 2011.

However, it would be premature for J.C. Penney bulls to gloat here. This is only a small step for the retailer, and it may not even be a step in the right direction.

As for the "small step" part, keep in mind that comps declined 31.7% during last year's holiday quarter. We didn't get a monthly breakdown at the time, but it's a safe bet that November, December, and January were brutal a year ago. J.C. Penney isn't anywhere near where it was two years ago, and it's not as if it was in such a good place then. 

However, the real reason that we can't read too much into this positive number is that we don't know if J.C. Penney is sacrificing margins for the sake of sales. We saw that a positive October came partly on the strength of promotional pricing and clearing out unsold merchandise at desperate pricing. How do we know that this isn't happening now?

In fact, we already know that J.C. Penney started off November with $3.75 billion in merchandise inventory. A year earlier it had just $3.36 billion. There will clearly be a greater incentive to clear out wares, and lower gross margins can more than offset any top-line gains. Gross margins slipped in the third quarter, and this is the fourth year in a row that gross margins have declined during the period. It's not the kind of momentum you want heading into the fourth quarter.

Analysts are already braced for a loss during the seasonally potent quarter, and they don't see J.C. Penney turning a profit anytime soon. The market may be cheering the double-digit uptick in comps, but it's an incomplete story. Save your applause for when J.C. Penney has actually earned it.

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The article J.C. Penney Still Has a Lot to Prove originally appeared on Fool.com.

Longtime Fool contributor Rick Munarriz 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.

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