Stay Away From This Retailer
Callum is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Note: This article made an erroneous reference to J.C. Penney's dividend. This has been corrected.
What's Big, Boring, and Red all Over?
J.C. Penney (NYSE: JCP) trades at a price to free cash flow (TTM) of -5.2 and at a book value of 1.41. It has room to fall. J.C. Penney saw its same stores drop 21.7% in the second quarter, far steeper than the 17.4% that was expected. J.C. Penney just simply can't seem to get it right, even after bringing in Ron Johnson. Ron Johnson used to work at Apple as their Senior Vice President of Retail Operations. He helped pioneer the Genius Bar and the Apple Retail Stores. Investors are hoping that he will be able to turn around JCP and to stop the rapid loss of customers.
Why is there no one here?
Under Ron Johnson, JCP changed their pricing style from coupons and sales to everyday low prices. So far this hasn't paid off as customers continue to leave in droves. As I already said, in the second quarter JCP saw its same store sales fall by 21.7%. In the first quarter, JCP same store sales fell 20%. That isn't a good trend, and it seems the turnaround play still hasn't paid off. What JCP wants to brand itself as is the company that doesn’t jerk you around, no more sales or promotions, just always low prices. Morgan Stanley did some research into their new pricing scheme; with most consumers saying that they didn't like the new system. This is the third rebranding effort over the past few years, which isn't a good sign.
Room to Fall
For a retailer that isn't profitable, JCP is trading at a fat premium. JCP should be trading at below book because it continues to lose money, which in turn erodes its book value. In the second quarter, JCP lost $147 million, compared to a $14 million profit a year ago. If JCP continues on this path, which it most likely will, expect it to drop below book value. Right now JCP has about $850 million in cash, but it has lost $500 million over the past year. Unless it can change its fortunes, it will run out of cash in a year or two. Plus JCP scrapped its dividend earlier in the year in order to preserve cash for their overhaul. JCP is expecting that it will continue to lose money in the next quarter.
Apples to Apples
What about the competition? Maybe this is a sector wide downfall that is hurting everyone. Well that hardly seems to be the case, Target (NYSE: TGT) reported 2.1% same store sales growth in September, 4.2% in August, 3.1% in July, and 2.1% June. Just because Target can grow its same store sales doesn't mean other stores can. Oh wait, Wal-Mart Stores (NYSE: WMT) has also seen its last 3 months of same store sales increased. Same store sales for 20 major retailers rose 3.7% last month. JCP stopped reporting same store sales a while ago, but as you can see the rest of the retailing space is doing fine.
JCP shares are down almost 32% YTD, even as the S&P 500 is up 16%. Target and Wal-Mart shares are both up a whopping 25% this year. So I guess there are two ways to look at this, JCP shares are undervalued and due for a turnaround. Or JCP is going to continue on its trajectory downward for a while until these turnaround measures take effect. If you are one of the few who is bullish on JCP but doesn't know when to buy, wait until at least its next earnings report. With US GDP growth coming in at 1.3% last quarter, consumer spending will continue to be depressed and this will hurt retailers. No reason to buy when JCP will most likely continue to fall for some time.
JCP can't seem to get its sales pitch to consumers right, and it is clearly being reflected in its same store sales and profits. I'm bearish on JCP for the moment and expect to see it fall below $20 by the end of 2012. If you are looking for a retailer play I would recommend something like a Target or Wal-Mart; companies with consistent free cash flows and can cover the cost of their dividends with ease.
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