Sozzi: J.C. Penney's Surprise

Editor's Note: This article was originally published at 10 a.m. on Real Money on Aug. 15. Sign up for a free trial of Real Money.

I am fighting the urge to pack it in for the week, foregoing my usual Friday store walks and careful note-taking. Retail earnings season tends to take a significant mental toll; there is much more to analyze than the raw numbers. Conference call information often contains discussions of new initiatives that will either fuel current strong sales and margins or hopefully reignite the business. Come second quarter earnings calls, guidance for back-to-school and holidays could completely overshadow a good or bad quarter. Although a fascinating sector to cover, especially now given the massive technological changes underway, retail is undervalued in terms of analytical difficulty. I know, cry me a river.

Despite the doom and gloom, definitely spewed by me in various reports and news interviews, there are a few fun things transpiring in retail that you should know about. None of it will move the needle for a company's sales or earnings right now, but will instead offer food for thought regarding the future.

  • Wal-Mart (WMT) is testing home delivery services at 383 China stores. 
  • We are on the cusp of all sports apparel being infused with technology to track health and gym/on the field performance. I believe Under Armour (UA) will be early to market, tapping into the rapidly growing user base of its MapMyFitness acquisition.
  • In a store walk with a company executive last week, Macy's (M) shared with me hopes that its new partnership with ShopKick will boost sales and margins as users receive targeted promotions on their mobile devices. Imagine walking by a towel section with the app open (it has to be open; due to security reasons retailers have to give you the option of entering into promotional programs on mobile devices) and being alerted to a sweet deal. Think of how you shop today; you would walk by the towel section with an iPod on, completely unaware of the sweet deal or turned off by the price point on the sign. Hence, the normal shopping habits keep markdown risk elevated.

Speaking of fun things, catch that J.C. Penney (JCP) quarter?

Sure, it's hard to say this when a company reports another massive loss for a three-month period, but J.C. Penney had a solid quarter. Ripping apart the quarter and comments, J.C. Penney once again delivered above its own guidance. In turn, that is continuing to gain it creed on the Street as it pertains to its sales, margin, and bottom line potential for the two critical periods left in 2014 (back-to-school and holiday) and in 2015.

I believe the pullback in the stock price following the results reflects concern on 3Q14 gross margins and the health of Mike Ullman, which recently underwent a surgical procedure. Here are the reasons behind J.C. Penney's shares popping overnight:

  • Off a low base or not, JC Penney's +6% same-store sales increase outpaced Macy's same-store sales increase of +4%, including licensed departments. The relative outperformance will only fuel this budding view that improved marketing and private label in stocks is helping J.C. Penney to gain market share, as was noted by CEO Mike Ullman on the press release. 
  • Gross margin in the quarter expanded 640 bps year-over-year.  J.C. Penney's merchandise mix is improving, with more items sold at promotional prices as opposed to clearance prices.
  • As for the second-biggest standout coming off this report: J.C. Penney noting "positive" free cash flow for 2014, up from a "breakeven" outlook offered three months ago.

At the time of publication, Sozzi had no positions in the stocks mentioned. This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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