E J.C. Penney Issues A Disaster In Q1 And Shareholders Take It On The Chin

J.C. Penney (JCP) reported an increasingly worrisome sales performance last week as the company put forth its Q1 2017 results.  Like Macy’s (M) and Kohl’s (KSS) before J.C. Penney, same-store-sales and total net sales fell YOY and missed analysts’ estimates.  Analysts had expected J.C. Penney to report a SSS comp of -.7% for the quarter, but the retailer grossly missed that target with SSS falling a dramatic 3.5% during the quarter. 

As an expert retail and consumer packaged goods analyst, I’ve chronicled my many retail analytics on specific retail names for Seeking Alpha and TalkMarkets. Since 2015, I’ve been broadly negative on the retail sector as a whole and as the shift to e-commerce consumption has increased more rapidly.  From Bed Bath & Beyond (BBBY), Macy’s and Target (TGT) down the line to Dillard’s (DDS) and J.C. Penney, these have been issued Sell ratings by and large and since 2015 in some cases. In 2016 and post reporting Q2 2016 results, J.C. Penney was reduced from Hold to Sell.  

In 2017, I reiterated my Sell rating even though shares of JCP were trading somewhat higher than when I initially issued the Sell rating in 2016.  I have further examined the potential of the retailer with regards to its past and present initiatives. I will be the first to admit that many of the initiatives put forth by the company in the way of home services, appliances, furniture, as well as beauty and apparel, are in the retailer’s best interest.  But more broadly, what investors have to consider is the value to place on such initiatives and a timeline for which the initiatives can produce a return on invested capital. It is for these mentioned considerations that I understood in 2016, the share price of JCP would decline even in the face of the offered improvements to retail operations.  Time was not on the investor’s side as the continued shift toward online shopping and away from brick & mortar storefronts would impact J.C. Penney revenues and same-store-sales. 

Since issuing a Sell rating, shares of JCP are down more than 55% and trading at all-time lows. It is from this point that investors will more readily benefit from considering the potential of the company going forward.  Sales are everything to a retailer as they determine the long-term potential of profits that can exhibit peaks and troughs intermittently. J.C. Penney is offering that the moves the company is making today will supplant their profit outlook for the future.  Having said that, the history of the retail world has been littered with like business models that have attempted, to some degree, what J.C. Penny is attempting.   Despite the many product and service implementations the retailer is putting forth, the underlying theme of the go-forward strategy for J.C. Penney is akin to that of Macy’s.  It’s the shrink to grow strategy that Macy’s is struggling to successfully implement and one that I warned a great many investors and analysts about in 2016.  Macy’s restructuring of the business included reducing its retail square footage by closing a set amount of stores. I warned investors that the “shrink to grow” strategy is riddled with problematic implementation and an overwhelming history of its failure. It was only a few days after issuing an analytical piece that sell-side analysts and investors were emailing me directly.

What many believed would offset the problems with the shrink to grow strategy was that of the potential to offload real estate through strategic sales.  Unfortunately and again, such a strategy has been attempted in the past and only to the detriment of the retailer implementing the strategy. Shrink to grow doesn’t work, nor has it ever in the big-box-retail business segment and regardless of the consumer trends of the time. As such, if we are to recapture the topic and business focus of J.C. Penney, their go-forward strategy breeds skepticism. 

The appropriate mix of storefronts and e-commerce business is a difficult one to produce.  This is especially the case when such a small percentage of retail sales are done online. Despite the overwhelming headlines that focus on e-commerce retail sales, the reality is that e-commerce accounts for less than 10% of total retail sales as reported by the United States Census Bureau. The problem for traditional brick & mortar retailers, however, is one of peak brick & mortar retail sales having largely been captured and as such every online sale impacts the brick & mortar retailer’s sales. In other words, for most every sale moved online, brick & mortar retailers are negatively impacted.  And therein lies the conundrum for retailers like J.C. Penney.

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Disclosure: I am short UVXY

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