Retail company J.C. Penney (NYSE: JCP) will release its quarterly earnings report for the second quarter after the market closes tomorrow, on August 14^th.  Retail trends show that consumer spending have been slowing down, and could lead to the company missing its earnings tomorrow.  For the past few months, the company has been slowly trying to pull itself back up from the depths of disaster. For the past two quarters, the company has posted adequate sales growth, but there is no doubt that J.C. Penney still has a long way to go to see the light. The company will have to report substantial figures to convince investors that the company’s efforts to turn itself around will yield meaningful results.

Expectations

The consensus estimation for J.C. Penney’s revenue last quarter was $2.78 billion, which is an increase of 4.4 percent year over year. In the first quarter of this year, the company managed to pull a revenue growth of 6.1 percent, while increasing comparable store sales by 6.2 percent. The company’s management board stated that these figures are expected to improve each month throughout the first quarter – thus the 4.4 percent year over year growth seems a bit too conservative. The company expected to achieve mid single digit comparable store sales for the second quarter, so if there is any sequential growth improvement for comparable store sales, it may be very small.

Analysts have also agreed that they expect the company to post losses of $0.94 per share, which is a huge improvement from the $2.16 a share loss from the second quarter of last year. However, even this improved estimation yields a $285 million loss, and a full year loss of $850 million, or $2.79 a share.

Two Key Points – Comparable Store Sales and Gross Margin

Despite claiming to have $2 billion in liquidity in both cash and credit, J.C. Penney is still losing an incredible amount of money. At the end of the year, these continuous losses will destroy that liquidity within a few years. If the company has any chance of avoiding this fate, it is necessary for it to display meaningful gains in both gross margins and comparable store sales.

Sales have plunged since 2012, and single digit comparable store sales growth just is enough. J.C Penney spent 41.9 percent of the revenue on operating expenses in the first quarter alone, compared to the 30 percent over the last ten years. So far, the company has made ends meet by cutting costs, but from here on out, the only way to improve is to increase sales.

In the 2014 fiscal year, the company posted revenues of $11.86 billion. Two years prior, the company hit $17.26 billion in revenue. This is a drop of 31.3 percent. If the revenue grew at the expected 6 percent, it would take approximately 6.5 years to make up for that decline, and the company’s remaining liquid funds would run out at that pace. The growth rate of comparable store sales would need to climb at double digits for the company to have any chance at recovering. Looking at the company’s guidance and analysts’ estimates, this recovery will not be happening.

As for gross margins, J.C. Penney must bring its numbers back up to past values. In 2014, gross margins fell to 29.4 percent, which fell from the high 30s in the past ten years. In the first quarter of this year, gross margins actually increased to 33.1 percent, but this is still far from the percentage of revenue near operating expenses.

Looking Forward

J.C. Penney now needs to focus on getting customers to return to its stores. According to Mike Ullman, CEO of J.C. Penney, April was the first month where the company experienced positive store traffic in thirty months. Tomorrow, August 14^th, we will see if store traffic continued to grow during this quarter as well.

The company has already taken steps and put measures in place to boost store traffic. First, the company has shifted its focus to its private brands that were avoided under the old management, such as St. John’s Bay. The success of these brands was seen during the first quarter, when they beat company’s expectations. Private label merchandise tends to yield high gross margins than national brands, and if the retailer continues to focus on such labels, it could see a boost in gross margins.

J.C. Penney also debuted its new home store section, named Home Collections. This line focuses on products that are geared more towards the typical J.C. Penney customer. Additionally, more Sephora stores were also opened within J.C. Penney locations, making the total number of Sephora stores in the retailer to 476. According to the company, these Sephora locations are performing extremely well.

Conclusion

It is clear that J.C. Penney is pulling out all the stops to pull itself back up to a viable stage. However, the company is not on solid ground yet. While its situation is not as perilous at it was a year ago, both gross margins and comparable store sales need to increase quickly in order to avoid problems with funding and liquidity in the near future. While many people are not optimistic about J.C. Penney’s future, investors should wait for the numbers in the company’s second quarter report before making a move.

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