I Love What You're Doing, But There's No Way I'm Buying

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

My wife forwarded me an email she got from J.C. Penny (NYSE: JCP) CEO Ron Johnson a few days ago, and it really caught my attention. The most important part was right at the top:

"I know that some retailers are opening on Thanksgiving this year.  But spending Thanksgiving with family is one of America's greatest traditions.  Since jcp was founded on the Golden Rule, I'm proud to honor this tradition by keeping our stores closed on this special day."

In the face of so many competing retailers announcing that they would be opening on Thanksgiving day,  it was a surprisingly refreshing decision for a major retailer to make at this most important time of the year.  While Target (NYSE: TGT) and Wal Mart (NYSE: WMT) opened at 9pm,  Sears Holdings Corp's (NASDAQ: SHLD) K-Mart stores were open all day, and the flagship Sears stores opened at 8pm, there is a good chance they took a small slice of sales that Penny left on the Thanksgiving table. 

Whether you take it with a grain of salt as a calculated decision to garner positive press, or truly a positive based on treating employees in an ethical and thoughtful manner, it was a decision that many shoppers will view in a positive light.  But that may not matter in the long run, but not because of a few hours of lost sales.  Honestly, J.C. Penny has been losing business for years. 

Let's take a look at what the past five years have been like for shareholders:

<img src="http://media.ycharts.com/charts/24eff0ff64fec803ba30fdd78ee86d02.png" />

JCP data by YCharts

Total revenues have been consistently trending downwards for years, driving a very volatile stock near or below what it could be had for during the Great Recession.  And as you can see from the P/E Ratio hanging out there in mid-chart: without earnings, it's pretty hard to have a Price/Earnings Ratio

I get it.  Great for employees, bad for Investors. 

While I applaud the decision to reward employees with Thanksgiving day off, that's not exactly what I meant- JCP has a much larger problem.  The added expense (many states require overtime pay on major holidays) to add a few hours to the shopping window between now and the end of the year wouldn't add much top-line or bottom-line improvement to the company's results.  On the surface, the decision to not open on Thanksgiving may be a reflection of being more focused on the business and not knee-jerk reacting to the competition.  If that's the case, it is indicative of smart planning. 

But with that said, JCP is not a place I would want to be investing new money today.  This may in time become, to coin a Peter Lynch strategy, a tremendous "turnaround" opportunity, but my recommendation is to wait until the turnaround is actually showing positive results before buying in.  

Sears Holdings is another company in essentially the same boat:

<img src="http://media.ycharts.com/charts/64a2321c9227e4017ff4375d90917edf.png" />

SHLD data by YCharts

These legacy retail "big boxes" are in a serious decline, and the bottom line is that investors have a plethora of other choices in the retail sector- businesses that are actually making money and still showing growth:

<img src="http://media.ycharts.com/charts/6caa391191fa7bbbedf756478e4406ea.png" />

WMT Revenue TTM data by YCharts

I know this chart is a bit busy, but there is an interesting correlation between Wal-Mart and Target that is worth noting.  The P/E valuation, share price and revenues all tend to track one another relatively closely.  And while it's important to note that there is no causation to this correlation, there is something important to learn, for one very important reason: 

Wal Mart is well-known for its ability to get merchandise where it sells.  Dozens, if not hundreds, of graduate research papers have been written about the logistical efficiency, and nimbleness of the Wal Mart supply chain.  And for Target's sales results, valuation, and share price changes to correlate with Wal Mart's, says a lot about the much smaller Target's ability to run an efficient business and show moderate sales growth in a persistently tough economic climate. 

However, there's one more retail operator that is head-and-shoulders above the competition:

<img src="http://media.ycharts.com/charts/59c24cdc6eba1ca3e408c4a295817fae.png" />

COST data by YCharts

Costco Wholesale (NASDAQ: COST) operates one of the most customer-centric businesses out there.  By passing on cost-savings to members, fine-tuning item sizes to best match consumer needs, and keeping operating costs as low as possible, membership renewal rates are consistently near and over 90%, even a year after membership rates were increased.  And it gets better. 

Factor in continued growth both domestically and overseas, the predictability that the loyal membership provides, and the incredible operational execution that drive solid results, and Costco is the best choice for my portfolio over all of the retailers that we have discussed.  Factor in a P/E ratio that has actually gone down, even as profits and revenues have gone up, and you can purchase shares of this tremendous business today at a great value. 

Time to go shopping?

Only if you are buying Costco, if you ask me.  Wal Mart and Target are solid companies, and investors have limited downside, but the upside isn't that significant.  Sears Holdings and J.C. Penny could very well become great turnaround opportunities, but I wouldn't risk a "penny" on Penny, or try to catch a "Blue Light Special" on Sears Holdings until management has proven that they have stopped the bleeding, and more importantly for these two, returned to the days of generating profitable revenues. The bottom line is that they could both go to "zero" before they double, to paraphrase another Lynchism. 

But that's just my opinion.  Get out there and do your own research.  After all, I'm just some guy with a Blog.

elihpaudio owns shares of Costco Wholesale. The Motley Fool owns shares of Costco Wholesale. Motley Fool newsletter services recommend Costco Wholesale. 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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