Why J.C. Penney Company Stock Is Plunging After Hours

The market's initial reaction to J.C. Penney's earnings was one of disdain, but that might change upon further reflection.

J.C. Penney reported fourth-quarter earnings this afternoon that showed adjusted net income came in flat, which amounted to a huge miss compared to Wall Street's expectations of a profit of $0.11 per share. Its stock plunged 10% in after-hours trading. Despite higher revenues of $3.89 billion that were up 2.9% and beat out estimates, and comparable-store sales rising above the high-end of management's guidance of 4%, the retailer's net income for the quarter was a $59 million loss, compared to a profit of $35 million in the same period of 2014.

However, last year's effort benefited from a non-recurring $270 million non-cash tax credit. While the markets had expected more money to be flowing to Penney's bottom line, the department store actually is still well on its way to the recovery everyone has been waiting for.

Beauty is in the eye of the beholder In particular, J.C. Penney's beauty supply retailer Sephora, which operates store-in-store boutiques in almost 500 stores, continues to drive traffic. Previously, the retailer noted Sephora for creating significant customer loyalty. This quarter, men's apparel, home, and fine jewelry were the top-performing merchandise divisions.

The other standout division this quarter was the online channel at jcpenney.com, which continued to be one of the company's best performers. It grew revenues to $428 million, a 12.5% increase over last year.

J.C. Penney enjoyed a strong Christmas shopping season. When its results are reviewed against those of its competitors, its performance doesn't seem as disastrous as the after-hours trading on its stock would appear.

Gaining on its rivalsMacy's reported sales growth of just 1.8% the other day, with comps up 2.5% from a year ago, but only 2% higher when excluding licensed businesses from the results. Kohl's reported earnings this morning, and said sales were almost 4% higher on a 3.7% increase in comps, suggesting J.C. Penney's relatively stronger showing means the retailer is luring away customers from its rivals.

And when you look at their respective guidance for the coming year, Penney appears to be a bit more upbeat than the competition too. Its guidance says 2015 comparable sales should grow between 3% and 5%, while Macy's offered a cautious outlook for the year, saying it expected just 1% growth in revenues with comps coming in 2% higher. Kohl's expects a comparable-sales increase of 1.5% to 2.5%.

A ghost from the pastOne headache J.C. Penney didn't need was the revival of the lawsuit Macy's filed against it relating to its deal with the diva of domesticity, Martha Stewart. An appeals court overturned a lower-court decision that found while J.C. Penney's was "over the top," its actions in signing on Stewart during a period when she had an exclusive arrangement with Macy's did not amount to a breach of confidentiality or unfair competition.

Macy's lawsuit against J.C. Penney keeps turning up like a bad penny as an appeals court has overturned a lower-court ruling.

The appeals court ruled J.C. Penney "misappropriated Macy's labor, skill, expenditures, and good will, all the while demonstrating bad faith in pursuing its objective." It did say Macy wasn't entitled to punitive damages; but it's an unnecessary distraction that the case is being resurrected at this particular moment, when the company needs to focus on gaining profitability.

Better than it looks When you look at the overall picture for J.C. Penney, it doesn't seem as bad as the killing the stock took after hours. The department-store operator ended the year with more than $2.1 billion in total available liquidity, along with inventory levels that were down 9.6% from the yea- ago period, to $2.65 billion.

Last year, it was still clearing the racks and offering lots of clearance merchandise, which drove traffic to the store. This time around, it didn't have that same tailwind, yet still turned in a strong operational performance. Gross margins improved 540 basis points, to 33.8% of sales compared to 28.4% last year. This gain was driven by significant improvement in its merchandise mix and the lack of so much clearance.

The clearance racks at J.C. Penney have been a lot thinner this time around.

Perhaps that's what made J.C. Penney's lack of profits such a surprise. I had been projecting its margins, and it's natural to expect it to make a bigger jump to the bottom line.

No matter... I still see the retailer as being on the track to recovery, and with after-market trading being notoriously thin, it wouldn't surprise me if those steep losses on its stock price were erased. There are challenges in the year ahead, but J.C. Penney should be a much improved business by then.

The article Why J.C. Penney Company Stock Is Plunging After Hours originally appeared on Fool.com.

Rich Duprey owns shares of J.C. Penney Company,. 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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