J.C. Penney: Don't Get Excited Yet

NEW YORK (TheStreet) -- On the surface, J.C. Penney's(JCP) first-quarter results appear to be a sign that the department store is on an upward trajectory. But peeling back the numbers raises some red flags for investors.

The mid-priced department store reported a nearly 7% increase in earnings to $64 million, or 28 cents per share, from $60 million, or 25 cents a share, a year earlier. That beat analysts' average estimate of 24 cents a share.

But much of that improvement came from lower pension expenses. Remove the impact of this, and J.C. Penney's operating income was actually down 13% in the quarter.

"We believe this is the more appropriate measure of performance as it eliminates some of the accounting inconsistencies between periods and focuses on the underlying retail business," PiperJaffray analyst Jeffrey Klinefelter wrote in a note.

J.C. Penney also has some of the easiest sales comparisons in the mid-tier sector. In order to justify a higher multiple, Klinefelter says that the company needs to start taking back incremental share and show continued improvements in underlying operations.

Gross margin narrowed 0.9% to 40.5%, more than analysts forecast.

As reported earlier in the month, J.C. Penney's sales grew less than 1% to $3.9 billion, while same-store sales rose 3.8%. Management foresees comparable sales rising between 3% and 4% in the second quarter.

The company also lifted its full-year earnings forecast to the range of $2.15 to $2.25 a share, from its prior outlook of $2 to $2.10.