The picture is starting to improve at J.C. Penney, but investors shouldn't get ahead of themselves.
J.C. Penney on Wednesday reaffirmed its outlook, which calls for an increase in comparable-store sales in the fourth quarter. But investors likely wanted to hear more about those turnaround efforts—including the size of the same-store sales gain—and Penney shares sold off briskly Wednesday morning, dropping as much as 9.3 percent.
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In a statement, the company said it is "pleased with its performance for the holiday period, showing continued progress in its turnaround efforts." The retailer also said "customers responded well" to its holiday sales, both in store and online.
Analysts had suspected that deep discounts and a return to its core brands would help the department store boost traffic—and likely, sales—at its stores last month, but they caution the retailer still isn't where it needs to be in its turnaround efforts.
Adam Jeffery | CNBC
While many had expected the retailer to post its third consecutive month of same-store sales gains for December—and its first quarterly gain in sales at stores open at least 12 months since the second quarter of 2011—analysts cautioned that the numbers should still be higher for a company in the midst of a makeover.
(Read more: Discount stores trail on the Web)
This is especially true in light of the easy comparisons Penney faces, they said, given that in the fourth quarter last year, the retailer saw same-store sales decline more than 30 percent.
"Be careful what we celebrate," said Wells Fargo analyst Paul Lejuez, who reaffirmed his "underperform" rating following Penney's announcement. "[Comparable-store sales] should absolutely be positive in the fourth quarter."
According to forecasts from Thomson Reuters, Penney's comparable-store sales estimate for December is 6.5 percent. If the retailer hits that number and its fourth-quarter estimate, it will be the highest revenue the company has posted in two years, Thomson Reuters said. But ringing in at nearly $4 billion, it would still fall well short of the $5.425 billion in revenue from the fiscal fourth quarter two years ago.
Although J.C. Penney doesn't officially report monthly same-store sales results, it has recently been providing monthly updates on its turnaround efforts. Last month, the retailer began to show signs of life when it said that same-store sales rose 10 percent for the month of November. But December's update didn't specify the size of the gain, which led Lejuez to estimate the month's comparable-store sales will come in flat, as opposed to the low- to mid-single-digit gain he had been expecting.
He pointed out that there was a time when the industry expected comps to rise 15 to 20 percent in the fourth quarter, but as the turnaround has taken longer than anticipated, it has brought down its expectations.
Last month, Lejuez said in a research note that the company's 10 percent same-store sales gain in November was "not as impressive (or as meaningful) as some believe," and that it's likely "as good as it gets." Department store counterparts Macy's and Belk have already cautioned that because of the calendar shift—Thanksgiving fell a week later this year—December sales will probably fall short of November figures. This will likely translate over to Penney's, Lejuez said.
What's more, although analysts said that traffic was certainly better than last year—when CEO Ron Johnson brought in designer brands that didn't resonate with the Penney customer, and did away with the company's aggressive promotional strategy—it should have been stronger, given the heavy promotional cadence.
In one instance, the retailer's Smith Haven mall store on Long Island, N.Y., marked down an entire rack of apparel to $1.97.
(Read more: JC Penney's $1.97 pants could ruin Christmas)
But Penney wasn't the only store ramping up promotions. The shorter holiday season provided one of the most competitive landscapes in years, with retailers aggressively promoting merchandise, in many cases offering 50 percent off the entire store. That made it particularly hard for Penney's, which positions itself on value, said Ken Perkins, president of Retail Metrics.