Why Did JCPenney Lose Momentum While Nordstrom Gained It?

Nordstrom and J.C. Penney  both traded significantly higher after they reported their earnings; the latter's peer Sears Holdings surprisingly lagged on Friday. While J.C. Penney began trading with an initial post-earnings gain of more than 25% in last Thursday's after-hours, it settled with a stock price gain of 16.2% on Friday. In contrast, Nordstrom opened on Friday with a gain of 9%, but then closed with a stock price gain of nearly 15%. Therefore, does this activity show how investors might trade both stocks moving forward?

Why did J.C. Penney lose momentum?
In the last three months, J.C. Penney has seen a stock price gain of nearly 60%, although it still shows a 12-month loss of almost 50%. The company has seen a short-term reversal of fortunes, as year-over-year growth against a poor 2013 has many believing that J.C. Penney has nowhere to go but up.

With that said, J.C. Penney's quarter showed some improvements across the board. The company had revenue growth of 6.1% driven by a 6.2% increase in same-store sales. Moreover, its gross margin rose a whopping 230 basis points to 33.1%, thus implying that pricing pressure is becoming less substantial and costs are becoming more manageable than they were last year.

High debt and credit concerns were major concerns for investors last year, in combination with rising inventory. However, J.C. Penney's newly announced $2.35 billion credit facility has bought the company some breathing room, thus giving investors time to see if this recovery is for real. J.C. Penney's falling momentum likely has something to do with a lack of conviction from investors or uncertainty as to whether it can sustain its comparable-sales growth, and rightfully so.

In retrospect, when you look at J.C. Penney relative to its peer Sears it's no wonder shares are struggling to maintain momentum. Currently, J.C. Penney shares trade at 0.25 times sales and the company has an operating margin of negative 9.5%. In comparison, Sears trades at a major discount of 0.10 times sales and has far better margins at negative 3.3%. 

With that said, some investors will note that J.C. Penney is worth the valuation premium, as its revenue grew in the first quarter versus a 7% decline for Sears. However, keep in mind the fundamentals of these two companies during the last couple years, which is very telling.

Company2013 Comparable Sales Decline2012 Comparable Sales Decline
J.C. Penney7.4% 25.2% 
Sears6.4% 2.5% 

The above chart is very telling, and further shows the incredible fundamental losses for J.C. Penney over the last two years. Hence, J.C. Penney's quarter might have been a move in the right direction, but the company still has a long way to go before saying its back as a top retailer. And compared to Sears, it does look pricey, which likely had some effect on the stock following earnings. 

Why did Nordstrom gain momentum?
While J.C. Penney has been one of the poorest-performing retailers of the last year, Nordstrom has remained one of the best, especially among larger companies in the space.

The company reported revenue growth of 6.5% to $2.93 billion, driven by its Rack outlet stores, which grew sales 20%, and a direct-sales increase of 33%. These numbers sparked gains, but as Nordstrom's conference call progressed and analysts produced their initial thoughts, the stock kept soaring higher.

Particularly, Nordstrom disclosed that it would be spending $3.9 billion over the next five years on online growth and expanding its number of Rack stores. Therefore, Nordstrom is placing an emphasis on its strengths -- at 16.5 times future earnings, it's priced attractively given this fact.

Not to mention, in a very difficult retail environment where pricing competition remains intense, Nordstrom has managed to support an operating margin of 10% plus. This means it has been able to keep its pricing power intact, with a solid balance of brands that keep high-end consumers in its stores.

Final thoughts
Investors appear to have gotten this one right: Nordstrom is one of the better-performing retailers and its quarter was a great indication of future results, while J.C. Penney's quarter was only good relative to low expectations and a poor 2013.

Therefore, the bottom line is that J.C. Penney didn't maintain its momentum because investors are skeptical, and rightfully so. Investors have better options than investing in the struggling retailer, as it still has much to prove. Meanwhile, Nordstrom is executing nearly flawlessly, and with signs of better days ahead, it's no wonder investors are still buying.

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The article Why Did JCPenney Lose Momentum While Nordstrom Gained It? originally appeared on Fool.com.

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