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J.C. Penney Shares Soar Despite Huge Earnings Disappointment


Big box retailer JC Penney (JCP) reported 2nd quarter earnings this morning. With the stock already down 37% for 2012, expectations were low. Specifically, the analysts were looking for a loss of $0.25 on $3.2 billion in revenue. What JCP reported instead was a loss of $0.37 on sales of $3.02 billion.

Ron Johnson, formerly Apple's (AAPL) head of retail operations, is leading JCP's turnaround effort. Warren Buffett once said "when a great manager takes over a bad business it's the business that emerges with its reputation intact." That sums up Johnson's tenure at JCP perfectly, where the man once thought to be a retail genius is risking being known as the guy that drove a once-proud company into bankruptcy.

Here's what CEO Ron Johnson had to say in the company's press release [Numbers added]:

(1) We have now completed the first six months of our transformation and while business continues to be softer than anticipated, we are confident the transformation of JC Penney is on track.

(2) The transition from a highly promotional business model to one based on everyday value will take time and we will stay the course.

(3) We continue to learn and adjust, and fully expect that our unique, specialty department store experience will drive JC Penney's long term success.

(4) Our rock solid balance sheet will support the execution of our transformation and position us for growth beginning in 2013.

These were less boilerplate statements common to all earnings releases than they were a cry for help. Every single sentence provides more than enough reason to avoid the stock. Taking them in the order they were presented...

(1) Unless the track is designed to lead JCP into Chapter 11 bankruptcy, nothing is moving in the right direction. "Confidence" without past or present results is just arrogance.

(2) Same-store sales, a measure of revenue growth at stores a year or more old and a key retail metric, fell over 22% in JCP's second-quarter. Customers are all but screaming for a return to a more promotional model. Being determined to ignore what your customer wants is atrocious business.

(3) "We continue to learn and adjust" directly contradicts "stay the course." Taken in sequence the comments amount to tacking "just kidding" onto the back of a cruel statement.

(4) Balance sheets contain assets and liabilities. Cash pays the bills. JCP doesn't have the cash to finish a turnaround without selling more assets. It's a strategy akin to selling your limbs to pay for cancer treatment.

"We knew the quarter was going to be bad coming in, but it was bad on top of bad," says Brian Sozzi, chief equities analyst at NBG productions. The stock may bounce for a trade but the fundamentals simply aren't there to make the case to buy and hold.

"In good faith I cannot tell my clients to buy this stock when these same-store sales continue to decline 20% plus, no bottom in margins, they missed consensus, they pulled non-GAAP guidance," Sozzi grimaces. "Horrible."

The clock is ticking, not just for what's lest of Johnson's reputation but for JCP as a viable company. Sozzi says the expense cuts at JCP are good, but not enough. "What would get me excited is if their rate of decline on same-store sales starts to level out and maybe they start delivering margins in-line with consensus."

That makes JCP a 2014 story for the fundamentals on a best case scenario. Time and the markets will tell if the company makes it that long.