Is A J.C. Penney Turnaround Becoming a Reality?

Traders looking for a sure bet on the bullish or bearish side for an individual stock, might want to stay far away from J.C. Penney JCP.

Only one short year ago, J.C. Penney was often put in the same destined-for-death basket as Sears. Analysts saying J.C. Penny was over valued argued it was easy for J.C. Penney to show improvement versus the ex-CEO Ron Johnson's era. In his reign J.C. Penney looked more like a ghost town with faint whispers of customers than a thriving retail store.

The change appears more real now; while J.C. Penney isn’t exactly thriving, the improvements have been impressive.

Recent Improvements

In the second quarter, J.C. Penney’s net sales came in at $2.8 billion versus $2.6 billion in the year-ago quarter. That gain reflected moderate-to-significant improvements across the board. Comps sales improved six percent year over year, net income jumped 71 percent, gross margin improved to 36 percent of sales versus 30 percent in the year-ago quarter (clearance sales performance was the primary catalyst of that change), and free cash flow increased $1.2 billion to $76 million.

Related Link: Who's Going To Shop At Sears?

On top of all that good news, selling, general, and administrative expenses declined $62 million thanks to lower store expenses, net advertising, corporate overhead, and improved credit income.

What’s most interesting is that J.C. Penney managed a gross margin improvement in a highly competitive retail environment. Consumers are looking for bargains at every corner, which has led to contracting margins for most retailers. The question now is: Can J.C. Penney keep it up?

Future Guidance

For the third quarter, J.C. Penney expects gross margin to be in line with the second quarter. Given the hesitant consumer due to lack of wage growth and underemployment, consistency seems positive. Also for the third quarter, J.C. Penney expects comps to be in the mid-single digits year over year; and for selling, general, and administrative expenses to be slightly higher than the year-ago quarter.

But what about the long haul? For the fiscal year, J.C. Penney expects a significant improvement in gross margin, comps to improve in the mid-single digits versus FY2013, and to generate positive free cash flow. Given all this good news: is J.C. Penny the best department store investment?

J.C. Penney vs. Macy’s M

To put J.C. Penney in context, match it up against Macy's on key metrics:

Short Position: J.C. Penney: 28.5 percent; Macy’s: 2.4 percent.

1-Year Stock Performance: J.C. Penney: Down 16.1 percent; Macy’s: Up 44.5 percent.

Dividend Yield: J.C. Penney: None; Macy’s: 2.1 percent.

5-Year Revenue: J.C. Penney: Down 32.3 percent; Macy’s: Up 18.9 percent.

1-Year Revenue: J.C. Penney: Up 0.54 percent; Macy’s: Down 0.20 percent

J.C. Penney’s revenue increase over the past year is far from substantial, but the progress has been phenomenal. On the other hand, is it possible for J.C. Penney to keep this momentum going when it’s facing the following headwinds: a hesitant consumer, fierce competition, a highly-promotional retail environment, a trend toward online shopping, and declining mall traffic?