There are more than a few similarities between Wall Street and a spoiled toddler. Not only do both expect someone else to clean up their messes, but when they want something they want it NOW. Accordingly, I can't say I'm all that surprised to see the widespread negative reaction to J.C. Penney's (NYSE:JCP) first quarter results. While these results were disappointing and do highlight the amount of work the new management team has to do, the fact is that major business restructurings and repositionings don't happen overnight.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

Terrible Sales Drive a Bad Quarter
J.C. Penney's new CEO Ron Johnson is trying to wean its shoppers away from the sale or promotion-heavy policies of the past, and that process is carrying some huge costs. Sales fell 20% this quarter, with a nearly 19% drop in same-store sales. This drop was fueled by many factors but, mainly a decline in traffic.

SEE: The History And Future Of Sears

With the terrible sales, it was not a big surprise that gross margin also came in at a disappointing level. Gross margin dropped almost three points to 37.6%, and the company's year-ago operating profit turned into a loss. Perhaps worse still, management made it clear that larger markdowns would be necessary to clear inventory - pointing towards an uglier margin in the near future.

Rome Wasn't Built in a Day
I am not going to pretend that J.C. Penney's results weren't disappointing, nor that the 19% drop in same-store sales isn't scary. But I also think a little perspective is in order here. Exactly what did shareholders think Ron Johnson was going to do in six months?

First of all, this is still a tough retail environment. Yes, American Eagle (NYSE:AEO) and Chico's (NYSE:CHS) have shown some signs of life, but even the much-loved Kohl's (NYSE:KSS) showed barely any same-store sales growth in its last quarter (up 0.2%).

SEE: Analyzing Retail Stocks

Second, J.C. Penney has been in a decline for years. I'm still not sold on the idea that there's still a great long-term future for mall anchor-stores like J.C. Penney, Macy's (NYSE:M) or Dillard's (NYSE:DDS), but even if there is, it's a tough market in which to launch a turnaround. J.C. Penney backed itself into a corner by training its customer to expect sales and markdowns (40% of 2011 transactions were sales-related), and there's going to be a painful shakeout process as the company shifts its strategy.

At the same time, I think management is making some logical long-term moves. Not only is management cutting promotions, but also looking to wring costs out of the supply chain. CEO Johnson has assembled a good team (including a new CFO, COO and President), and moves like the strategic alliance with Martha Stewart Living Omnimedia (NYSE:MSO) and the acquisition of the Liz Claiborne brands should help J.C. Penney reestablish worthwhile proprietary brands.

The Bottom Line
Although I think the Street's reaction to J.C. Penney's results has been a little ridiculous, that doesn't mean I'm a fan of the stock today. I think there's still a reasonable chance that J.C. Penney can fix its problems, but I don't see much upside - even a "fixed" J.C. Penney is not likely to see revenue growth much above the mid-single digits, nor an especially robust-free cash flow margin. Moreover, I believe the ongoing expansion of "cheap chic" alternatives like H&M is only going to add more pressure to the situation.

SEE: The 4 R's Of Investing In Retail

Below book value I'd probably take a look at these shares, but the valuation is well above that point today. Accordingly, while I disagree strongly that the first quarter results prove Johnson's turnaround is a failure, I don't see any particular reason to own these shares right now.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  2. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  3. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  4. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  5. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  6. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  7. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  8. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
  9. Mutual Funds & ETFs

    3 Vanguard Equity Fund Underperformers

    Discover three funds from Vanguard Group that consistently underperform their indexes. Learn how consistent most Vanguard low-fee funds are at matching their indexes.
  10. Investing News

    Alphabet Earnings Beat Expectations (GOOGL, AAPL)

    Alphabet's earnings crush analysts' expectations; now bigger than Apple?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
Trading Center