Warrior Spirit Alone Won't Save J.C. Penney

By Markets Fool.com

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J.C. Penney was one of last week's biggest winners. The department store chain came through with surprisingly robust sales growth during the nine-week period of November and December. Comps rose an encouraging 3.7%, leading J.C. Penney to forecast landing at the upper end of its original forecast for same-store sales between 2% and 4% during the seasonally potent holiday quarter that ends later this month.

The stock soared nearly 26% last week on the news, and CEO Myron Ullman offered up a colorful quote in the earnings announcement.

"I would like to thank our associates for their hard work, warrior spirit and commitment to delivering an exceptional customer experience every day," Ullman said in the stock-popping press release.

Warrior spirit? It's certainly noble to tag a company's front line with spiritual and tribal attributes, but J.C. Penney still has far to go before it can crank out the swagger and bravado.

It's true this will be the second consecutive holiday quarter of improvement, following last year's 2% uptick in comps. However, that followed a brutal 31.7% plunge in comps during the preceding holiday quarter, and a 3.1% slide in fiscal 2011's final period. Work the math from fiscal 2010, and holiday quarter sales are 29.8% lower at the average store than they were four years ago. That's pretty brutal, explaining why the stock is still in the single-digits.

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It's not just sales that have far to go before shareholders and warriors can go on a high-fiving rampage. J.C. Penney's ability to mark up its merchandise has also been tested. Gross margin improved to 28.4% during last year's holiday quarter, but that is still far removed from the chain's historical peak of 38.2% in gross margin during the fourth quarter of fiscal 2009.

Losing the battle to win the war
If J.C. Penney does succeed in its turnaround, it's going to do so with a few less warriors. Three days after gushing about its holiday showing, the company revealed it would close 40 of its 1,060 remaining stores. It will take a $38 million charge to cover the retreat.

There were no glowing quotes from Ullman with that announcement. It was just a dry SEC filing after Friday's market close.

J.C. Penney isn't the only chain that is closing stores after the holidays --Wet Seal shuttered nearly two-thirds of its mall stores last week. However, it's just an important reminder that the iconic department store chain is taking baby steps back even as it takes baby steps forward. Comparable-store sales have shown marginal improvement sincelate 2013, but there's still a lot to fix if the chain continues to close stores and cut employees loose.

A good indicator that J.C. Penney has truly bottomed out will be when it turns the corner of profitability. The company is wrapping up what will be its fourth consecutive year in the red, and analysts anticipate a couple more annual losses. Gradual improvement in sales and margins may be enough to ease creditor concerns, but sooner or later it mustbecome that profitable and growing retailer that it used to be.

The article Warrior Spirit Alone Won't Save J.C. Penney originally appeared on Fool.com.

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.