On Wednesday, J.C. Penney reported that gross margin in the fourth quarter rose to 28.4% from 23.8% a year earlier. Improvements in the future may be even better.
Ullman resumed the helm last April. With so many fires to put out, there's no way the management team had time to fully exploit the holiday-shopping season. All else being equal, investors can reasonably expect further improvement.
Investors will want to pay particular attention to store closings. In the coming weeks, we should see 33 stores close for good; about 25% of them are located in Wisconsin.
The 33 stores represent about 3% of the 1,100 J.C. Penney stores. Because anchor stores generally have long-term leases that are cost prohibitive to break, many underperforming stores will remain open because it is better to operate a marginal location than to break a lease.
The losses from poorly performing stores are baked in the cake and are reason to add to a position. Because the losses are priced in, if the losing locations become profitable or are able to be vacated (i.e. another tenant can be found), it becomes gold for shareholders.
With expectations of continued bleeding, the market is offering a "heads-you-win, tails-you-break-even" opportunity. If the stores continue to perform poorly, it's already discounted. If Ullman and the management team can turn the low performers into profitable locations, the extra revenue goes straight to the bottom line.
Keep in mind the solution doesn't have to be improving sales; the solution could be co-locating with other brands. Sears, for instance, is surrendering parts of its stores to other brands in an attempt to reduce total floor space.
Ullman will find solutions. With J.C. Penney's shares well under $8, investors are in a position to profit as the story unfolds. J.C Penney will regain old highs from here.