Although J.C. Penney's numbers are not a disaster and represent a significant sequential improvement over the prior quarter, they are nevertheless underwhelming. While we maintain the company is moving in the right direction, the lack of progress on profit and same-store sales both highlight that the turnaround program is a long-term endeavor that will take some time to deliver.
Admittedly the second quarter numbers were impacted by some exceptional events. Among these was the liquidation of inventory across 127 stores which the company is closing. While necessary, this corrective action was damaging to margins and diluted profits. The pain of today, however, will turn into tomorrow's gain when the cost savings from the shuttered stores start to filter through.
Given that JCP remains in a state of flux, short term shifts in numbers do not always provide a full and meaningful measure of the business. It is better to take a step back and assess longer term trends and look at the general trajectory. On both of these fronts, we remain satisfied that JCP is a financially stronger business than it was several years ago, and that it is building a proposition that is more relevant and meaningful to shoppers.
On a category basis, we believe real progress has been made with home, footwear, and fashion accessories. The company has gained customers across these segments -- including younger shoppers who might previously have shunned JCP. The demographic shift is, in part, aided by the expansion and success of Sephora which continues to act as a magnet, pulling consumers into JCP stores.
One area where much further work is needed is apparel. JCP has made strides in some areas like kidswear, but its performance on womenswear is still lackluster. This is partly a function of the market which remains saturated with choice, is discount focused, and is beset by consumers who are bored with clothes shopping.
However, against this backdrop, JCP needs to work much harder to create a compelling and well-defined fashion assortment. In our view, while some improvements are evident, collections still lack the oomph and excitement required to entice shoppers.
Looking ahead, we maintain our view that, financially, this will be a year of limited progress for JCP. The corrective actions required, and the costs associated with them, will cancel out any gains that are made.
However, strategically this is a year of advancement: Longstanding problems are being remedied, the balance sheet is being strengthened, and the business is on a more stable footing. This is the platform on which growth can be built, but that growth won't come through until 2018 at the earliest.