Why Shares of J. C. Penney Company, Inc Surged 40% in February

By Markets Fool.com

IMAGE SOURCE: MOTLEY FOOL.

Continue Reading Below

J.C. Penney is on fire. Based on data from S&P Global Market Intelligence, shares of the department store gained 40% in February alone, and they are up nearly 70% year-to-date. Let's take a look at the main drivers behind this impressive performance and, perhaps more importantly, what the future could bring for investors in J.C. Penney.

The turnaround is gaining momentum
J.C Penney is in the midst of a turnaround, and the company's earnings report for the quarter ended Jan. 30, 2016, confirmed that the business remains on the right track. This period is particularly important for department stores, since it includes the seasonally crucial holiday period.

Total revenue for the three-month period came in at $4 billion, an increase of 2.6% versus $3.9 billion in the same period last year. Importantly, J.C Penney delivered a big increase of 4.1% in comparable store sales. This was the ninth consecutive quarter in which comparable sales increased year over year, and the number is up by 8.5% versus comparable sales two years ago. Growing comparable sales is arguably the main driver behind J.C Penney's explosive gains, as this shows that management is succeeding at turning the business around.

Profit margins are also improving. J.C. Penney announced a gross profit margin of 34% last quarter. This represents a 30 basis point increase versus the year-ago quarter due to improvements in clearance and promotional selling margins. Management is also keeping operating costs under control -- SG&A expenses declined by $70 million to $962 million, or 24% of sales, a 240 basis point improvement from the same quarter a year ago.

The company is still losing money on a GAAP basis, but adjusted net income was $121 million after excluding costs associated with primary pension plan expense, restructuring costs and the loss on extinguishment of debt.

Continue Reading Below

The future looks good
Management believes it can continue to improve performance this year. J.C. Penney is forecasting comparable sales during fiscal year 2016 to increase by 3% to 4%, gross profit margin to jump by 40 to 60 basis points, and SG&A expense to decline in dollar terms. The company also expects positive earnings per share figures for the year. Turnarounds are seldom easy, especially in the challenging retail business, but J.C. Penney is proving to shareholders that it's moving in the right direction.

The article Why Shares of J. C. Penney Company, Inc Surged 40% in February originally appeared on Fool.com.

Andrs Cardenal 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.