Musings From The Mall

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

I have always felt that businesses have lives and stories just as much as people do with tales of redemption, misfortune, failure and success. So another trek to the mall was in order to see how three old friends were faring.

I've visited J.C. Penney's several times to see if it's really as bad as analysts say. The stock has dropped for months as former Apple exec and J.C. Penney Company (NYSE: JCP) CEO Ron Johnson tries to turn around what was a musty, fusty retailer.

I just visited on an early Sunday evening the store looked bright. Not quite surgical theater bright but almost full spectrum daylight bright and it looked clean, spacious and well organized. Store within a store concepts were brightly highlighted with more shoppers than I expected.

Then at Macy's (NYSE: M) were the markdown, clearance, and half off signage that J.C. Penney had eschewed. The lighting was dimmer and the fixtures looked slightly down at heel. The store had as many customers as Penney's but with more associates chatting among themselves.

Sears, owned by Sears Holding Corporation (NASDAQ: SHLD) was once again a grim death experience, with a how do you say it politely, an atmosphere of desperation.

Redemption for J.C. Penney?

Penney’s is much improved from five years ago when the stores were cluttered and the merchandise was stale. While it could still probably get rid of the portrait studios and even the beauty salons, the merchandise mix is vastly better although it doesn’t carry the most wanted brands like Macy’s.

J.C. Penney’s is trading at a negative EPS of -$2.39 with a forward P/E of 7.11 for 2014 and it’s closer to a 52 week low than its high of $43.09. Over the last year it's lost 47.87% of its market cap. Analysts give it a mean target of $20.00. It has significant insider ownership with CEO Johnson owning 892,979 shares. Interestingly, former president Michael Francis, key to the marketing turnaround, is still listed as owning 1 million shares. Yet he left abruptly in June after only eight months at the helm with a three sentence release from the company.

The bad numbers keep on coming however with a negative return on equity of -8.73% and quarterly revenue growth of -20.10% and a negative profit margin of -2.30% and a debt load of 3.10 billion to total cash of 839 million. So far this year any redemption has come in the form of shareholders getting out while the getting is good. Short interest is still high in the name at a 23.90%.

J.C. Penney reminds me of one of those old movies where the spinsterish secretary gets all gussied up, lets down her hair, takes off her glasses and unbuttons a button (or two) and then the boss she pines for says, “Why, Miss Carstairs, I never realized how beautiful you are!” But with J.C. Penney this transformation is more hard won. In this case our Miss Carstairs has a lot more work winning a new generation of shoppers.

I think it’s possible that given time, J.C. Penney, while unlikely to be the retail disruptor it was decades ago when it basically put Montgomery Ward out of business, may with belt tightening and some snazzy new togs finally impress that boss.

Macy’s Shouldn’t Rest On Its Laurels

Macy’s reminds me of the college BMOC and star athlete who smugly takes their success for granted. Macy’s has certainly been a retail star outperforming the S&P 500 this year by 3.63% but its prices are too high for the same merchandise as at Penney’s and Kohl’s.

The company istrading at an 11.81 P/E with a 2.10% yield at a payout ratio of 22% and has pulled back some 10% from its high after reporting same store sales in November were down, the first such drop in three years. The decline in comps was blamed on Hurricane Sandy. It has a very capable CEO in Terry Lundgren who owns  396,357 shares.

The company has 840 Macy’s and Bloomingdale’s stores and e-commerce but has large debt outstanding of 6.94 billion to 1.26 billion in total cash.

The quarterly growth numbers at 3.80% for revenue and 4.30% for earnings are just not that exciting nor is a profit margin at 4.99% although not razor thin like supermarkets.

Sears..So Sad

Sears just reminds me of one of those people living in the past. So sad that  a venerable retailer is reduced to this. The EPS is -$26.84 despite owning 3,684 stores. According to technicals it’s oversold here but just walk into a store, there’s a reason for that. The Kmart stores are no better. Although it reported losing less than expected on its Q3 earnings release sales still declined by 5.7% at Sears Canada, 4.6% at Sears domestic (US stores) and Kmart sales by 7.8%.

While the cash position rose and debt declined slightly due to cost cutting and raising money from an offering of Sears Canada common shares as well as cutting inventory levels, it's too little, too late.

Competition on appliances and electronics is so vicious that despite having a valued and trusted name in Kenmore and Craftsman tools Sears has been given a mean target by analysts of $17.33 with a low target at $7.00 is below even 2004 levels. The short interest has been increasing and now stands at 39.30%. The return on equity is -48.30%, the profit margin is a negative 7.30%.

Just Stay Away From Retail?

I think J.C. Penney is showing decidedly hopeful signs of improvement. Sears, however, is just a very bad bargain.

If you want one of these stocks ask yourself if I had a choice of receiving a gift card from one of these three retailers which one would I choose? I would probably choose Macy’s but only shop on sale. That's right, never pay retail, wait for a pullback.

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