Time is Up for This Company

Callum is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Falling Off The Cliff

Year to date J.C. Penney (NYSE: JCP) is down 53%, and over the past 5 days it has fallen by 24%. The stock keeps getting pummeled. Some may cry (like Bill Ackman) a turn-around play, touting JCP's efforts to convert to a clear and fair price store, away from a promotional-heavy retailer. Others will point to the fact that JCP's same store sales have fallen 26.1% year over year and that it hasn't turned a profit since Q4 2011. Let's look to see if JCP is destined for failure or if it can turn itself around.

Same Store Sales and Profit Problems

This is the dreaded concept that management at JCP can't seem to get up. Same store sales are down 26.1% year over year, total sales are down 26.6%, and internet sales are down 37.3% year over year. Why would anyone want to go to jcpenney.com when they could go to Amazon (NASDAQ: AMZN) instead, which has a larger selection of goods for cheaper prices. As internet shopping continues to rise, retailers need to expand their online offering.

Forrester Research predicts that online retail shopping in the US will rise from $155.2 billion in 2009 to $248.7 billion in 2014. Also, Forrester points out that "three product categories (computers, apparel, and consumer electronics) represented more than 44 percent of online sales ($67.6 billion) in 2009," which is important because JCP is primarily an apparel retailer. 

Wal-Mart, the retailing giant, is trying to offer a better and more streamlined online experience, so why isn't JCP? Now, to be fair to the company, Ron Johnson's (JCP's CEO and ex-Apple executive) new department concepts (or as he calls them, New JCP) are experiencing higher sales per square foot at $270, more than the $135 per square foot the Old JCP is getting. So one could argue that if Ron is able to fully implement his renovation of JCP that it could turn around and start posting same store sales growth and a profit. The problem is that JCP only has about $525 million on its balance sheet and is losing hundreds of millions each quarter. In the last quarter alone JCP lost $123 million, $203 million "excluding the net gain on the sales of non-core assets, restructuring and management transition charges, and non-cash primary pension plan expenses." Soon JCP will run out of money and assets to sell before Ron can do all the changes he needs to.

The Turn-Around Story

What Ron Johnson and Bill Ackman want is to turn J.C. Penney into a specialty retailer from a boring brick and mortar drain of capital. So far Ron's new JCP concept accounts for about 11% of the business and is producing some significant results where it has been implemented. He will also point out that it is cheap to do this because the space for these new stores is already there (nice and wide open without any pesky customers getting in the way) and all you have to do is tweak them a little bit to get big results. The corner stone of Ron's plan is turning JCP from a promotional retailer based on coupons and discounts into a Fair and Square system where there are always low prices. He sees this as the best way to go because JCP isn't playing games with consumers and they will be more satisfied with the pricing scheme. He also wants to turn roughly 700 JCP stores (out of 1,100) into 80 to 100 specialty stores. So far this hasn't panned out as planned, and JCP's same store sales continue to fall.

Comparison

Sears (NASDAQ: SHLD) fell almost 19% on Friday after it reported earnings that didn't come close to expectations. It lost $498 million ($4.70 a share) compared to estimates for a $230 million loss ($2.17 a share). Domestic same store sales were down 3.1%, with a 1.8% decline at Sears Domestic and a 4.8% decline at Kmart. Sears and J.C. Penney both operate in the same sector and both are getting hurt pretty bad right now. Both are relying on asset sales to keep them going, but if these large retailers are flooding the market with their assets, pricing will get hurt (by how much I don't know, but the law of supply and demand isn't going to work in their favor). 

Final Thoughts

I'm bearish on JCP. Ron is trying as hard as he can and the super-rich Bill Ackman is backing him, but at the end of the day JCP has neither the results nor the time to justify opening up a long position in this stock. It has fallen rather hard recently so I wouldn't be too quick to go out and short it just yet, but if it ever goes up past $20, it's time to short short short.

Soon JCP will run out of money. They have already cut their dividend and their balance sheet is being depleted fast. Every quarter that goes by shareholders lose more and more value; that's why I'm bearish on JCP.


callumturcan has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com. Motley Fool newsletter services recommend Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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