Photographer: Patrick T. Fallon/Bloomberg
Photographer: Patrick T. Fallon/Bloomberg

J.C. Penney Co. is reporting some good news for a change:

Same-store sales will rise by a mid-single digit percentage and gross margin will “significantly” improve this year, the Plano, Texas-based company said yesterday in a statement. Liquidity at the end of 2014 is projected to remain at $2 billion. The sharesrose to $7.27 at 10:06 a.m., after reaching $7.50, the biggest intraday gain since at least 1980. Even with the jump, the stock is only at the highest price since Jan. 10....

The chain also posted its first profit in more than two years in the fourth quarter, benefiting from [Chief Executive Officer Mike] Ullman returning the company to its traditional discounting strategy and reviving popular private-label brands.

Net incomewas $35 million, or 11 cents a share, in the quarter ended Jan. 31, compared with a loss of $552 million, or $2.51, a year earlier, the company said. Excluding the sale of assets and tax benefits, such as a $270 million change in the value of its pension, the company posted a loss of 68 cents a share. The average of 24 estimates compiled by Bloomberg was a loss of 86 cents.
The company has spent the past 10 months improving its finances and operations and now is ready to return to growth and profitability, Ullman said on a conference call with analysts to discuss the results.

Revenue fell, however, and was slightly lower than analyst expectations.

My first reaction to this was, “the dead cat, it bounces” -- as in the old trader saying about market rebounds that even a dead cat will bounce if you drop it from a sufficiently lofty height. J.C. Penney’s same store-sales have been dropping by horrific percentages since mid-2012. Part of this was clearly due to former chief executive officer Ron Johnson’s attempt to make the stores younger, a little more upscale and fun. This drove away their main shoppers: middle-class folks in late middle age.

The new regime has rolled back most of the changes that Johnson made. It would be surprising if this didn’t boost the company’s same-store sales. But that doesn’t address the problem that Johnson was originally hired to fix, which is that its demographic is aging, and its core business model, “big stores in big malls,” has a lot of problems, as shoppers desert them for open-air shopping centers. On top of that, Penney’s shoppers tend to hail from the lower-middle-class demographic that has been hit especially hard by the last five years.

With revenue still in decline (albeit, a much shallower decline), most of the improvement has to come from getting better control over costs. And that’s great to see any business do. But ultimately, Penney’s most important problem is not costs. It is finding new loyal customers before the current ones die off. It’s no good being the low-cost purveyor of goods to nobody.

To contact the writer of this article: Megan McArdle at mmcardle3@bloomberg.net

To contact the editor responsible for this article: James Gibney at +1-202-624-1863 or jgibney5@bloomberg.net