J.C. Penney Company, Inc. (NYSE:JCP) surprised in a big way with its earnings report this week. Shares remain up by more than 15% as of this writing, but is this just the first day of a long streak? In a report dated May 15, 2014, Sterne Agee analysts Charles Grom, Renato Basanta and John Parke say they had been expecting a possible short squeeze because of the potential for better same store sales and gross profit margins.

J.C. Penney Company JCP

However, they still caution investors on the retail chain’s turnaround and said they wouldn’t chase the stock just yet. They reiterated their Neutral rating on J.C. Penney Company, Inc. (NYSE:JCP) and increased their estimates.

J.C. Penney looks “respectable”

In their report, the analysts said J.C. Penney Company, Inc. (NYSE:JCP) has a “respectable” rating on Team Grom’s Quality Review Tracker. The department store chain reported GAAP losses per share of $1.15 for the first quarter or losses of $1.14 per share excluding $1 billion in pension expenses. That’s compared to their estimate of losses of $1.29 per share and Wall Street’s estimate of $1.25 per share in losses.

They note that the two main upside drivers were the higher total sales of $2.8 billion, driven by the 6.2% increase in comparable store sales. Like others, they also pointed to the company’s reduction in selling, general and administrative expenses. However, they had been expecting a 418 basis point increase in gross profit margins, which missed their estimate, coming in at a 224 basis point increase and partially offsetting the two positives.

Four good points for J.C. Penney

The Sterne Agee team noticed a balance in good and bad points for J.C. Penney Company, Inc. (NYSE:JCP). They note that the retail chain beat their comparable store sales model of a 2% increase and even the buy-side’s expectations of about 4%. Second, they said they were “impressed” that the retailer was able to cut its inventory levels, noting only a 1.3% increase in inventory at the end of the quarter.

Third, they again mentioned selling, general and administrative expenses, saying that they’re still “well controlled” and have declined significantly year over year. And fourth, J.C. Penney Company, Inc. (NYSE:JCP) reiterated its liquidity outlook of $2 billion for the year. The company also replaced its $1.85 bill ABL Bank line with a new $2.35 billion senior secured ABL credit facility.

Four bad points for J.C. Penney

On the negative side, they point out that J.C. Penney Company, Inc. (NYSE:JCP)’s “3-year stacked rate” was down 29.3%, saying that this was “ironically very consistent” with the company’s fourth quarter performance of a 31.5% decline. Because of this, the Sterne Agee analysts wonder whether the company’s improvement is only the product of an easy comparison with last year’s difficult year.

Second, they note that traffic was still negative during the quarter, as it turned positive in April for the first time in 30 months, possibly due to the Easter shift. Third, they say over half of the gain in comparable store sales was because of last year’s home department closing in about 500 stores.

And fourth, they note that J.C. Penney Company, Inc. (NYSE:JCP) has brought private brands back to about 50% of its product mix, compared to 30% last year, and clearance levels back to normal levels. Because of these facts, they were surprised gross profit margins weren’t better.

New estimates for J.C. Penney

J.C. Penney Company, Inc. (NYSE:JCP) reiterated its fiscal 2014 year guidance. It includes mid-single-digit improvements in same store sales, significant gross profit margin improvements, $630 million in depreciation and amortization, $250 million in capital expenditures, breakeven cash flow and $2 billion in liquidity.

Because of these numbers, the Sterne Agee team adjusted their numbers. They now expect losses of $3.06 per share for the current fiscal year and losses of $2.16 per share for the 2015 fiscal year. That’s compared to their previous estimates of $3.24 per share in losses for 2014 and $2.59 per share in losses for 2015.