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J.C. Penney reports earnings — here is why investors are cheering

Brian Sozzi
Editor-at-Large

It was another turd of a quarter for struggling J.C. Penney (JCP). But minor convulsions indicating some life in the slowly dying business before the holidays has investors bidding up the stock for the second straight earnings day.

The quick analysis from J.C. Penney’s third quarter. Estimates via Yahoo Finance analysis:

  • Revenue: $2.5 billion vs. expectations of $2.51 billion

  • Adjusted loss per share: $0.30 vs. expectations of $0.55

  • Same-store sales: -9.3% vs. expectations of -8.3%

  • Gross profit margins: improved 350 basis points from the prior year

  • Outlook: reiterated full year same-store sales decline of 7% to 8%

And J.C. Penney CEO Jill Soltau says:

“The past quarter was an exciting and energizing time at JCPenney as we made significant progress on our efforts to return JCPenney to sustainable, profitable growth. We are beginning to see results – both in our numbers and how we operate as a business – from the early implementation of our Plan for Renewal, which is focused on driving traffic, offering compelling merchandise, providing an engaging experience, fueling growth, and building a results-minded culture. Going forward, I am confident that delivering our strategy, coupled with our ongoing discipline and commitment to improving the foundational elements of our business, will return JCPenney to its rightful place in the retail industry.”

A potential 2020 turnaround unlikely

J.C. Penney’s stock popped 8% in early trading off the results, extending a shock rally that has seen shares surge 89% in three months time. Some in the market have come to view J.C. Penney as a potential 2020 turnaround play, fueled by Soltau’s efforts to transform operations and stabilize cash flow. That thesis is largely on display in the third quarter — the gross profit improvement reflects actions to sell merchandise with better margins and reduce slow-selling inventory.

Shoppers walk into a J.C. Penney department store in Hialeah, Fla. (AP Photo/Alan Diaz, File)

But the bottom line on J.C. Penney is that it has next to zero sales momentum headed into its most important quarter, the holidays. Macy’s stores look better on holidays already. Target is dominating in apparel. Amazon is Amazon. J.C. Penney’s struggles the past five years have left it out of the conversation for many shoppers.

Moreover, the company’s cash flow position of $157 million is very precarious even if Soltau and her team continue to play up more than $1.5 billion in total liquidity likely at yearend (as they did in today’s press release.)

In the end, the stock is a near-term momentum play at best as the shorts (40%-plus short position right now) get drilled. But by no means is J.C. Penney fundamentally sound, or perhaps the turnaround play traders are currently banking on.

Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Follow him on Twitter @BrianSozzi

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