J.C. Penney Tries to Put Its Failure Behind It

With the flick of a pen, J.C. Penney has severed its past and moved things toward a new and -- potentially -- shining future. CEO Mike Ullman has announced that he is stepping aside for the second time, putting former Home Depot Executive Marvin Ellison in charge of the company next year. The last time Ullman left, J.C. Penney ended up with visionary leader Ron Johnson, who ran the business into the ground. Fortunately for shareholders Ellison's background should give investors more hopethat the mistakes of the Johnson era won't be repeated. 

Ellison comes from Home Depot, where he the last spent twelve years. Most recently, he was vice president of stores. The solid, no frills style of Home Depot should fit well with J.C. Penney's overall strategy, and should give the company a clean break from its ugly past. The retailer has been marching steadily forward, as of late, and Ellison's arrival will be the final act in J.C. Penney's relaunch.

Struggling sales have leveled off
There's no reason to dig too deep into the mire -- it should be enough to say that Johnson made a mess of things while he was at the helm. J.C. Penney was in a place where sales looked like they might never recover, good brand name or not. This time last year, for instance, the company was in the middle of a quarter that would see comparable store sales fall by 26.1%.

Now, J.C. Penney is riding its last quarter's comparable store sales increase of 6%. The company is finally clawing back some of the loss that it's experienced over the last two years. In doing so, J.C. Penney has also managed to keep its gross margin up. In the first half of this year, gross margin has come in at 34.5% -- a four and a half point increase from 2013's first half.

In short, the top line is looking like a solid place once again. J.C. Penney is finding ways to get people into the store, and there is less reliance on sales to do so, helping to push that gross margin up.

J.C. Penney's cost concerns
While the top line is growing, the bottom line is still sunk. In the first half of the year, J.C. Penney has lost $524 million -- ouch. That's still better than last year, though, when the company was sitting on a $934 million loss halfway through. Unfortunately, management has forecasted more spending to round out the year. An increase in advertising is scheduled for the third quarter, and that could keep eating away at profits.

The hope is obviously that advertising turns into more traffic, giving J.C. Penney the momentum it needs to make this year's holiday season a success. The company earns almost a third of its total revenue in the fourth quarter. That quarter happens to be the first full quarter with Ellison on board in the president's seat -- he'll take over as CEO next August.

The proving ground is set. While Ellison won't have much say in how things go during the holidays, he will be the new voice and leadership on the frontlines. J.C. Penney is on the right track, it just needs to keep its momentum up for the next few months.

If it can do that, it should be able to inch its way toward a positive earnings result, and by the time Ellison takes over as CEO, the hardships of the part might be fading from memory. That would be an incredible cap to an impressive turnaround, all managed by Ullman. It would certainly be a fitting final end for a man who left the company on poor terms the first time. Look out for comparable store sales in the fourth quarter, as that's when this turn around will be made or broken.