- Shares of J.C. Penney surged on its second quarter earnings results.
- While gross margin increased, comparable store sales growth actually slowed down compared to the first quarter.
- J.C. Penney cannot return to profitability on just gross margin growth alone, a point I made in a previous article.
Retailer J.C. Penney (NYSE:JCP) reported its second quarter results after the market closed on August 14, and while the stock initially jumped by as much as 15% after hours, the results were mixed at best. I stated in a previous article that J.C. Penney's turnaround was still a long shot, and while some progress was made by the company during the second quarter, there's still plenty to be concerned about.
Comparable store sales increased by 6% during the second quarter, but this is actually worse than the result from the first quarter, where the company posted comparable store sales growth of 7.4% using the new methodology explained in the first quarter earnings release. I stated in my earnings preview that comparable store sales growth acceleration was unlikely given the previous guidance, and it seems that J.C. Penney is stuck in the mid-single digits. Given how far sales have declined over the past few years, this isn't fast enough.
Gross margin improved significantly to 36%, but without rapid comparable store sales growth operating expenses are still eating up all of the gross profit and then some. J.C. Penney needs an operating margin of about 3.8% just to break even after interest payments, 6.3 percentage points above the result from the second quarter. Gross margin growth alone can't bring J.C. Penney back to profitability, and the comparable store sales growth during the second quarter, while seemingly impressive, just isn't enough.