Does This Company Belong in the Museum of Retail?

AnnaLisa 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 has been amended to better reflect the capital injection from Goldman Sachs. Motley Fool apologizes for the error.

It had been a while since I visited a J.C. Penney Company (NYSE: JCP) department store so I went to one I hadn't visited in at least seven years. It had always been cluttered, dark, and old-fashioned looking with motherly sales associates who knew where everything was and called you "honey." The clientele was older but it was usually busy.

Had you blindfolded me and walked me in there I wouldn't have recognized the place. It was the Bizarro version of what it had been, very clean, very bright, clothes folded with Swiss precision ...and virtually empty except for the youthful sales associates. It was like a Bauhaus museum of retail.

Former CEO Ron Johnson had really changed the store visually giving it almost an Apple store look but without the crowds. (Interestingly,  Johnson once suggested a version of the Apple genius bar in the middle of the stores.) Somehow it was soulless.

An unofficial ratio of salespeople to customers would be 3:1 and the only department doing a brisk business was the in-store Sephora beauty pop-up. So this is what a dying store looked like.

What could go right?

In its favor, the return of CEO Myron "Mike" Ullman since early April has buoyed the stock by 30%. It should be noted, however that he was CEO from December 2004 to February 2012 when the shares dropped from $80.00 to $15.00.

The company issued a widely publicized apology to the general public in April claiming they were now listening. Splashmedia CEO Chris Kraft (no relation) said after the campaign social media buzz rose over 400% with positive comments about the stores doubling on social media. If any customers were saying anything it was quiet enough to hear when I visited.

Also J.C. Penney received an injection of capital from Goldman Sachs in the form of a $2.25 billion, the proceeds were used to pay off a $1.75 billion 2023 bond. The company has also received some Street support from hedge fund titans Bill Ackman and George Soros buying stakes.

.  The company has also received some Street support from hedge fund titans Bill Ackman and George Soros buying stakes.

Even before Ullman returned the company had slashed staff, 19,000 laid off during Johnson's tenure alone, and discontinued the dividend.

What could still be wrong?

The company has only until Labor Day before vendors penalize them with a 21% interest rate according to Burt Flickinger, a Strategic Resource Group analyst, in a radio interview.

A good 30% of J.C. Penney's customers are probably gone forever. Younger customers aren't interested. The only customers under 20 were in the Sephora checking out makeup not at the main store cosmetics counters.

The home sections have been expanded to include designers like Michael Graves, Conran, and Jonathan Adler and were empty just as Credit Suisse analyst Michael Exstein found during recent channel checks prompting him to cut estimates on July 17 for the next quarter and likely the one after that.

Exstein noted customers were clustered around clothing clearance and what few customers I saw  besides in the Sephora were lackadaisically fingering clothes on sale, not even bothering to explore the edges of the store with more clearance items. This is even after the return of coupons and private label brands like St. Johns Bay apparel.

Before Ullman returned one of the last things Ron Johnson did was to bring in new retail partners like Joe Fresh, a hot Canadian clothing brand, Cosabella lingerie, and Nanette Lapore women's apparel. The lines were all there at the store today, totally deserted.

Both Macy's (NYSE: M) and The Bon-Ton have benefited from J.C. Penney's misfortune with Fitch upgrading Bon-Ton's debt rating citing more traffic from J.C. Penney's customers. As long ago as May 2012, Macy's CEO Terry Lundgren told Women's Wear Daily they would be gaining J.C. Penney's customers.

J.C. Penney's earnings have been decreasing year after year from total 2010 EPS of $1.36 to $-4.09 year to date and revenues of $17.61 billion in 2010 dropping to $6.52 billion year to date. The short interest at J.C. Penney is at 23.60%, but that's down from 43% in March when Ron Johnson was still CEO. It is trading at a price/book of 1.31.

<img alt="" src="http://media.ycharts.com/charts/7e16aaaf2641bbe22cc268e20aaab05e.png" />

JCP Revenue TTM data by YCharts

Macy's has been the retail winner, often anchoring the same malls as J.C. Penney and Sears. The charts tell most of the story but one should note Macy's 14.81 trailing P/E and 2.00% yield. The stock is up over 40% over the last year, outperforming most of its peers including Kohl's (NYSE: KSS) which has underperformed the S&P 500, only up 7.83%, and Sears Holdings which has underperformed J.C. Penney, down 19.15%.

Macy's and its higher-end Bloomingdale's stores carry the brands that America wants and Macy's has been partnering with designers on special collections throughout the year. Revenues and earnings keep accelerating on Lundgren's watch.

The company already has a plethora of back-to-school events, cross promotions, giveaways, and social media campaigns that should really keep momentum going for Macy's until holiday season.

<img alt="" src="http://media.ycharts.com/charts/4f4ef8fe4070e34c9de12b2517411cc4.png" />

M Revenue TTM data by YCharts

Kohl's, the third  major department store chain, is holding its own, mostly thanks to defecting Penney's and Sears customers. Although having a lower trailing P/E of 12.52 and a 2.60% yield analysts' expected five year EPS growth of 7.90% is almost half that of Macy's at 14.38%.

Kohl's should be doing better going forward as it's trying to juice its online presence and partnering with designers like Macy's and Target have. It has a ways to catch up to Macy's, which is just executing so well.

<img alt="" src="http://media.ycharts.com/charts/d45020fb6e7cd54cf18e1def2f9a24ae.png" />

KSS Total Return Price data by YCharts

Back to J.C. Penney, if it can somehow make it through the next few quarters analysts still believe five year EPS growth will be -27.65%. The company has done all it can do except bring back customers.

The Foolish takeaway

J.C. Penney, despite reassurances from CEO Ullman in May that by 2014 the turnaround would be solidly underway, is just not a buy. Not when Macy's is so clearly outexecuting them. If Kohl's yield were higher I might advise buying Kohl's, but total return at Macy's is so much better. Just buy Macy's.



AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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