J.C. Penney Company Earnings: Slow and Steady May Yet Win the Race

By Markets Fool.com

J.C. Penney's first-quarter earnings report shows the retailer continues to back away from the brink where it found itself two years ago after a disastrous overhaul left it clinging to life. But the pace of improvement means this will continue to be a long, slow process. Q1 results were reported Wednesday after market close.

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Sales were up from the year-ago period and losses were narrowed, a trend we've been seeing over the past few quarters, but comparable sales came in slightly less than what the company indicated they would when it apparently accidentally leaked its quarterly performance last month. So even though J.C. Penney raised its full-year guidance in Wednesday's report, I wouldn't put much faith in those numbers just yet.

Source:J.C. Penney's earnings report, Yahoo! Finance. Chart by author.

Net sales rose to $2.86 billion in the first quarter, a 2% improvement over the year-ago period when it recorded $2.80 billion in sales. And because it was able to increase the penetration of its private label brands, gross margin improved 330 basis points to 36.4%, up from 33.1% last year.

Further, J.C. Penney was able to greatly control costs -- selling, general, and administrative expenses were down more than 4% year over year -- allowing operating income to jump 70%, giving it a loss of just $75 million while net losses were halved to $0.55 per share.

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Good, though not great
J.C. Penney said Q1 same-store sales were up 3.4% from last year, which is a positive trend -- but not only is that half the rate they grew at a year ago, as well as a deceleration from the fourth quarter, it's less than the 3.5% to 4.5% range the company gave a month ago when it inadvertently tipped off analysts that it was having a strong quarter up till that point. At that time, comparable sales were running a strong 6% as a result of the Easter holiday pulling sales into the month of March. While it figured they'd tail off in April, CEO Mike Ullman said in the conference call that the last week of the month was especially weak.

J.C. Penney apparently thinks it will be able to keep momentum going, though. The first week of the new quarter is reportedly off to a strong start, and the company raised the lower end of its full-year comparable sales guidance from a range of 3% to 5% up to 4% to 5% growth.

Women's fashion, including handbags and shoes, remain a key component to J.C. Penney's recovery.

Apparel suits it fine
It did have some notable performances in men's and women's apparel, especially tailored clothing, dresses, and handbags. And, as is becoming the norm, J.C. Penney said it experienced another outstanding quarter of sales from beauty supplies leader Sephora, which is why the store-in-store boutique has become one of the anchors of the retailer's "center core" growth strategy (another one is fine jewelry, which also did well).

The retailer opened 23 Sephora locations this quarter and expanded six more, bringing the total number of Sephora Inside JCPenney locations to 515.

Perhaps of equal importance is J.C. Penney's expanding its relationship with the beauty products supplier to offer its merchandise online, which will begin later this month. Considering how well Sephora attracts customers to its physical stores, an online relationship may help the website generate more sales as well.

Omnichannel gains in importance
J.C. Penney is already gaining traction at its website, especially with its ship-to-store delivery program, which is helping incrementally increase sales. The retailer noted that a customer who buys online and elects to have the purchase delivered to the store will, on average, purchase additional merchandise 20% of the time when she visits to pick up her order.

There are still many parts of J.C. Penney that need to be adjusted, but they're complex and not quick fixes. The home department, for example, whether online or in-store, needs not only the right balance between hard and soft goods, but brands, pricing, style, and selection within each.

During the former CEO's attempted transformation, many factors were skewed. For instance, furniture styles were more modern, whereas the typical J.C. Penney customer is more traditional. Getting that right again takes time, not just in terms of inventory, but in coaxing customers back.

J.C. Penney's first quarter was good, but shows that, while improvements continue to be made, the recovery won't be fast, and will oftentimes be lumpy. That, of course, is better than the alternative the retailer presented investors not that long ago.

The article J.C. Penney Company Earnings: Slow and Steady May Yet Win the Race originally appeared on Fool.com.

Rich Duprey owns shares of J.C. Penney Company,. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. 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.