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JCPenney Earnings: A Turning Point for JCP Stock

JCP shareholders haven't breathed a sigh of relief yet, but they have a reason to


JCPenney (JCP) might have technically posted another loss for its second quarter of 2014 … but for all intents and purposes, Q2 was smashing success.

J.C. Penney (NYSE:JCP)For the first time in years, there’s a glimmer of hope the retailer will actually come out of its coma. And while it might be a bit soon for anyone who owns JCPenney stock to pop the cork on a bottle of champagne, shares are finally acting like they’ve got a shot at moving significantly higher.

JCPenney Earnings

The JCPenney earnings report showed improvement for every relevant number in Q2, perhaps the most important of which was per-share income. Although the department store chain still booked a loss of 56 cents per share, that was enormously better than the loss of $2.66 per share taken in Q2 2013. The figure also trounced estimates for a loss of 90 cents per share.

The absolute net loss of $172 million was palatable compared to the loss of $586 million the company posted in the same quarter a year earlier … the first time in several years JCPenney generated better year-over-year income.

Sales-wise, the JCPenney earnings report offered similar improvement. Total revenue grew from $2.66 billion in the second quarter of 2013 to $2.8 billion this time around, topping expectations of $2.78 billion. It also was the first quarter in years that JCP managed to report a year-over-year increase in total revenue.

Perhaps most important of all, though, same-store sales grew 6%, vs. the anticipated improvement of 5.8%. Same-store sales are a crucial metric for investors because the positive and negative impacts of store opening and store closings are negated. As such, the measure indicates how effective the typical in-store efforts are.

Q2 was the third quarter in a row JCPenney posted same-store sales growth.

Really a Reason for Optimism From JCPenney Stock Owners?

This earnings preview from earlier in the week made the point that Q2 could — and should — mark a turning point (for the better) for the retailer.

It did.

Not that one quarter makes or breaks a trend, but all trends start with that first small step. Had we just seen an earnings improvement or a sales improvement or a same-store sales improvement in the second quarter, it would be easy to dismiss JCPenney’s results as luck.

To see improvements on all three fronts, though? That’s not luck — that’s progress, as painstakingly slow as it might be.

Critics might be quick to point out that JCPenney suggested in its conference call that its third-quarter margins would be less than thrilling, largely stemming from back-to-school promotions. JCP has learned, however, the importance of underpromising and overdelivering; it’s likely no accident that JCPenney has topped earnings estimates in each of its past three quarters.

Bottom Line

As riveting as the JCPenney earnings report was, even more riveting was the market’s response to the earnings report.

Investors loved it for a few minutes, sending JCP stock up as much as 10% in after-hours trading on Thursday. As for Friday’s regular trading session, though, JCPenney stock was actually down more than 3%.

What gives?

Part of the drop has been blamed on the market’s response to news that CEO Mike Ullman recently underwent surgery. Despite it being old news, since the procedure was a treatment for a chronic condition, investors inferred he might be unable to remain at his post for as long as hoped.

It’s an unmerited connecting of the dots, though. Sometimes, a routine procedure is just a routine procedure.

While it could be several more quarters before JCPenney is in a position to turn a profit, that is the shape of things to come. In retailing, not much happens by accident. One quarter of improvement is a sign that the turnaround is for real, and underway.

JCPenney stock offers more upside than downside from here.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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