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JCPenney Is Toast: Wal-Mart Wins Among Retailers

November 09, 2012 | About:
Here is a headline that should come as no surprise to anyone: “JCPenney (JCP) Turnaround in Doubt as Sales Plummet,” CNBC, Nov. 9, 2012.

Big shock. J.C. Penney has been a company struggling to find direction for the past 20 years. The company is a “tweener” that had a hard enough time competing with the likes of Wal-Mart (WMT) and Target (TGT) on the low end and with Dillard’s (DDS) and Macy’s (M) at the mid-range price point before the Internet revolution. But now that the company has to compete with established Internet retailers like Amazon.com (AMZN) and every up-and-coming online retailer as well.

To put it bluntly, J.C. Penny is toast. For a long-term play almost guaranteed to make money, you could consider shorting it and waiting for it to eventually go belly up. But that’s not what I want to discuss today. Instead, I want to recommend that readers pick up shares of Wal-Mart.

Consumer sentiment is improving—Reuters reports that it just hit a five-year high — yet with the dreaded fiscal cliff looming in the wake of the presidential election, I expect consumers to be looking for bargains in their Christmas shopping this year.

This is bullish for low-cost Internet retailers, of course. Yet with Amazon.com and other major online players now forced to levy sales taxes, the cost differential with “bricks and mortar” retailers isn’t as wide as it used to be.

And this brings me back to Wal-Mart. In addition to running the largest chain of retail stores in the world by sales, Wal-Mart is aggressively jumping into Amazon’s territory with an expanded online presence. It may be years before Wal-Mart is able to effectively compete with Amazon in the online sphere, but Wal-Mart’s massive physical presence does give it one unique advantage over Amazon that I expect to be significant over time: the avoidance of shipping costs. As an example, I recently dropped several hundred dollars buying my son a tree house. Wal-Mart’s price was roughly equal to Amazon’s, yet I was able to save nearly $300 in shipping costs due to my option of picking up the boxes at my local store (alas, it has been two weeks and I am still trying to assemble the @#$& thing, but that is another story for another article).

Wal-Mart trades for 13 times next year’s expected earnings and yields a reasonable 2.2% in dividends. I consider this a stock that you can buy and hold for at least the next one to five years.

Disclosures: Sizemore Capital is long WMT.

About the author:

Charles Sizemore
Charles Lewis Sizemore, CFA is the Chief Investment Officer of Sizemore Capital Management. Please contact our offices today for a portfolio consultation.

Mr. Sizemore has been a repeat guest on Fox Business News, has been quoted in Barron’s Magazine and the Wall Street Journal, and has been published in many respected financial websites, including MarketWatch, TheStreet.com, InvestorPlace, MSN Money, Seeking Alpha, Stocks, Futures, and Options Magazine and The Daily Reckoning.

Visit Charles Sizemore's Website


Rating: 2.0/5 (27 votes)

Comments

The Science of Hitting
The Science of Hitting premium member - 2 years ago
"To put it bluntly, JCPenny is toast. For a long-term play almost guaranteed to make money, you could consider shorting it and waiting for it to eventually go belly up."

What do you think about the value of the real estate? Would you mind explaining why this is "almost guaranteed" to go belly up? I'm willing to bet that you know little to nothing about the situation (particularly the balance sheet)...

Also, are you short JCP? How long have you been short if you are? Thanks

valueinvestor
Valueinvestor premium member - 2 years ago


I'd have to disagree with this article. While I think Wal-Mart will do well, rising consumer sentiment generally bodes well for retail that is up market of Wal-Mart. At today's valuation I would say WMT is a hold/reduce on valuation and JCP is a buy. Also bankruptcy is not a strong possibility at JCP in my opinion. At these prices the downside is somewhat limited on JCP and the upside could be quite attractive. Just my opinion. FYI I own both.
random_walker
Random_walker - 2 years ago
One of the worst articles I've read. Gurufocus, you are lowering your standard by publishing things like this.
cdubey
Cdubey - 2 years ago
The headline from CNBC is not surprising.

I am quite surprised by the way you used it in the article though. You would be well advised to switch off CNBC and do your own research.

I just removed you from my RSS feed. I can get better advice by tossing a coin.
w1omega
W1omega - 2 years ago
If I were a shareholder of JCP, I would rather compete against Dillard's and Macy's than Target, Walmart or Costco. Ackman's thesis makes sense on paper, perhaps especially for LT. But who really knows if short term pain will be just that - short term?

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