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J.C. Penney’s turnaround losing steam?

November 12, 2014, 10:04 PM UTC

J.C. Penney’s (JCP) comeback has hit a serious speed bump: the department store chain on Wednesday reported comparable sales were unchanged last quarter, ending a streak of three quarters of growth and re-igniting concerns that much of the business it lost in the last two years is gone for good.

Penney scared investors just a few weeks ago when it lowered its sales forecast for the quarter ending Nov. 1 and gave a long term forecast that made clear how far it still has to go to recover from the failed efforts of former CEO Ron Johnson, given the boot in April 2013, to reinvent the 112-year-old retailers as a hip, more upmarket department store.

J.C. Penney’s flat comparable sales for the quarter were below what it had guided to (low single digits) last month and below the 2.8% growth Wall Street was expecting, according to Consensus Matrix. To be fair, Macy’s (M) also reported poor quarterly sales, and Wall Street expects dismal sales from Kohl’s (KSS) when that retailer reports on Thursday.

Net sales came in at $2.76 billion, less than the Street expected, and 30.6% below the third-quarter sales it enjoyed three years ago, before Johnson’s “transformation” began. In the 19 months since Myron Ullman return to the helm, replacing the man who replaced him in 2011, Penney has jettisoned fancy brands its price conscious shoppers didn’t take to and brought back house labels like the billion-dollar St. John’s Bay as well as a steady stream of discounts and coupons. That helped stop the bleeding and in fact started the company on the path to recovery.

But the absence of comparable sales growth, especially after it fell 4.8% in the year-ago quarter, raises the question of how much more—or even whether—sales can rebound. Penney itself struck an optimistic note, saying it expects comparable sales (online sales plus sales at stores open since at least a year) to rise between 2% and 4% in this holiday quarter. Ullman said he’s “pleased” with trends so far in November. And CFO Ed Record told analysts that shopper traffic was still in decline, ominous as the holiday season kicks into high gear.

There were however some bright spots—Penney’s net loss so far this year, three quarters in, is down by half to $1.4 billion versus a year ago, as it has been able to finally clear out the merchandise that Johnson brought in and flopped. So its gross margin rose to 36.6% of sales from 29.5% a year earlier. And the company still expects to end the year with $2.1 billion in liquidity, reassuring to investors and vendors who a year ago wondered about its financial health.

Last month, Penney announced former Home Depot (HD) Marvin Ellison, would take over as CEO in August after a few months as president, beginning Nov. 1. “We are nearing the completion of JCPenney’s turnaround,” current CEO Ullman said. Ellison clearly has his work cut out for him.