J.C. Penney Stock: Delaying the Inevitable Flop

Tickers in this article: JCP

NEW YORK ( TheStreet) --  J.C. Penney has been Wall Street's punching bag for more than two years. Despite yesterday's "positive" earnings news, the company is simply delaying the inevitable and will likely not be around in a few more years.

For right now, J.C. Penney is a trade -- not an investment -- boosted by short covering and speculation. A company's share price is defined as the present value of their future earnings. Considering the company reported a $352 million loss last quarter and will likely not see a profit in the near future, Penney's current share price essentially has no basis.

Moreover, everyone is talking about comparables such as same store sales, which rose 6.2% year-over-year. However, this increase follows a 16.6% drop from a year earlier. Obviously, it is much easier to show improvement on dismal numbers such as those, as well as disguise the company's previous nine-quarter decline in same store sales by highlighting the most recent consecutive gains over the last two quarters.

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In addition, the company's recent unadjusted net loss of $1.15 a share only looks better than last year's $1.58 a share loss because of Penney's increasing shares outstanding, which increased by 85 million to 305 million. In fact, compared to last year's $348 million unadjusted quarterly net loss, this quarter's $352 million is actually worse. Further disguising the company's lack of real improvement is the fact that the company realized Selling, General & Administrative savings of $69 million from recent company layoffs and store closures.

Meanwhile, gross margins did improve from the previous year by more than 2%, but were likely helped by the company's sales of its more profitable private labels such as St. John's Bay and Worthington, which have increased to about 50% of sales from about 30% under former Chief Executive Officer Ron Johnson. Additionally, the company said that gross margin was negatively impacted by an increase in clearance sales as a percentage of total sales in both February and March. Although this mix improved in April, these levels are likely to remain elevated for the foreseeable future as the company continues to work to attract shoppers and clear existing inventory.

Finally, despite the company's ability to increase its credit facility by $500 million, the fact remains that Penney is still experiencing negative cash flows for the time being. While the company expects to reverse that and achieve break-even free cash flow by year end, we remain skeptical. The company's ability to improve free cash flow will continue to be hampered by its increasing debt load which has grown to almost $5 billion from just less than $3 billion this time last year.