Is JC Penney Hopelessly Out-of-Style?

By Jonathan Yates - August 3, 2012 | Tickers: AMZN, JCP, SHLD, TGT, WMT | 0 Comments

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Retail stores are going out-of-fashion for many consumers, and thus the investor community.

When Sears and K-Mart were merged into Sears Holdings (NASDAQ: SHLD) by hedge fund billionaire Eddie Lampert, it was hoped that a new retail giant would be formed, with synergies resulting and the value of its real estate assets maximized.  Like JC Penney (NYSE: JCP), Sears Holdings has suffered from competition from Wal-Mart (NYSE: WMT), Target (NYSE: TGT) and Amazon (NASDAQ: AMZN).  While Sears has fallen 21.80% for the last quarter of market action, JC Penny is down 40.40% for the same period.

JC Penney has tried everything, from bringing in a new CEO, who was the head of retail for Apple, to setting up in-store boutiques and vendors, and now permanently marking down the price of items.  None of these have worked with either shoppers from Main Street or investors from Wall Street.  On a quarterly basis, sales growth is down by 20.06% for JC Penney.  For the last six months, the stock price is down by 48.84%.

These problems are not recent for JC Penney.  Revenue has fallen from $19.9 billion in 2007 to $17.3 billion in 2011.  Earnings also fell during that span, from $1.1 billion to a loss of $152 million.  Over that period, prices for the shares of JC Penney have collapsed by more than 70%.  Not even that discount is attracting investors as the stock is down 4.45% for the last week of trading.

The future does not seem any brighter for JC Penney.  According to one analyst, "...full year sales will be lower by -16.8% to -19.6% (see table). This projection assumes that the company will have a total sales drop of about 25% in the second quarter that is just ending, followed by continued double digit declines in the second half of 2012.  As a result, store closings and asset write downs are likely. I estimate that some 250 stores will be classified as impaired by management by the end of the year and that the company will have to write down the assets."

Results for the first quarter of JC Penney certainly point to that denouement.  Revenue plummeted by 20.1% to $3.2 billion.   JC Penney posted a loss of $163 million.  Internet sales for JC Penney, needed to go toe-to-toe with Amazon, fell by 27.9% to $271 million.  These trends make servicing the onerous debt-to-equity ratio of 0.79 for JC Penney even more burdensome.

There is a "death spiral" that is becoming very recognizable for retail store chains.  Although many blame Wal-Mart, it is a series of blows.  Competing against Wal-Mart is certainly not easy.  But many have thrived in this space, such as Target and Costco Wholesale Corporation.  Having to deal with online goods from the likes of Amazon and eBay is draining, particularly with Amazon moving forward to offer same day service.  But that has not harmed Wal-Mart, Target or Costco.

What is considered a sign of strength, a massive chain of stores, becomes a weakness very quickly.  Once an asset due to the presence in a bustling mall, these stores quickly become a liability when shoppers prefer the convenience of a Big Box retailer or the benefits of shopping online from home, particularly with gas increasing in price. There is a phenomenon of increasing numbers of Americans staying at home more rather than venturing out to shop or attend events.  It has been noticed at many sporting venues where attendance is down.  It can be observed in the retail sector where sales are up for Amazon and eBay, but falling for chain stores such as JC Penney.

For whatever reason, chain stores just lose the "it" needed for customers to decide if it is worth the time and expense to leave home for the facility, and then go to that one over the rich choice of options available to the American consumer for just about everything.  Blockbuster lost "it" when Netflix made watching movies at home all that much more pleasurable.  It appears as if Radio Shack and Best Buy are losing "it" as buying consumer electronics is becoming much easier on Amazon, more rewarding at an Apple store, or more convenient when combined with other shopping needs at Wal-Mart, Target or Costco Wholesale Corporation.  The "it" is going away for SuperValu as it did for Winn Dixie as groceries can be bought for much lower prices at Big Box retail stores.

JC Penney's new pricing policy takes effect in August and will affect about one-fifth of the items for sale in the stores.  It has been a tough, tough year for JC Penney.  Both vendors and customers were confused by the new pricing policy.  All have suffered: One CEO of a JC Penney reported a 70% plunge in sales at the stores.  There is no shortage of competitors to go to to make up that shortfall.

Now around $20 a share, JC Penny is very close to its 52-week low.  There is a massive short float of 27.65% (a short float of 5% is considered to be troubling for a company).   Activist investor Bill Ackman has taken a huge position in JC Penney, convinced that he can make 15 times his initial investment.  Eddie Lampert thought the same with his investment in Sears and K-Mart; and since the companies were merged in 2005, the share price has fallen from around $150 to about $50. 

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