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Naman Shukla
Naman Shukla
Articles (220) 

JCPenney’s Chances of Bankruptcy Are High

Despite the recent increase in foot traffic, retailer is at the wrong end of the inflection point

April 25, 2017 | About:

The risk of obsolescence is looming large on the brick-and-mortar retailers.

With many traditional retailers closing stores across the country and the continuing decline of foot traffic, it is certain that consumers are migrating toward online retailers. Given the fact that online shopping is usually cheaper and more convenient than traditional shopping, it is no surprise that retail stores are closing down left, right and center.

The secular trend of consumers migrating to online retailers will ultimately result in several bankruptcies across the brick-and-mortar retail space. The companies with high debt will likely go out first, which is why I think investors should stay far away from them or even short them. The company with probably the biggest risk of bankruptcy is JCPenney (NYSE:JCP). The company was already distressed before online retailers started gaining traction and, as a result, has accumulated a huge debt of roughly $4 billion.

With profit margins falling and the company closing stores across the country, the long-term outlook for the company’s prospects is gloomier by the day.

It was recently reported that JCPenney was going to hold on closing a few retail stores due to a sudden increase in foot traffic. While this may be interpreted as a bottom, investors shouldn’t read too much into it. An increase in foot traffic can happen for various reasons and there is nothing suggesting that this could be a long-term trend.

JCPenney is doing the smarter thing by holding off on the closures as the increase in foot traffic, which is likely temporary, will help the company liquidate some of its inventories. That being said, investors shouldn’t bet on this trend to continue for a long period of time as the company will probably go through with the closures when the foot traffic starts to decline.

Conclusion

Investors should not read too much into JCPenney’s recent announcements as there’s nothing suggesting that the increase in foot traffic is a long-term trend. Despite the decision to hold off closures of a few stores, it is likely that JCPenney will close stores when foot traffic starts to decline again. In the meantime, the company is doing the smarter thing as the increase in foot traffic will help it liquidate its assets. That being said, the company’s long-term prospects still look gloomy.

Disclosure: I do not hold a position in the stock mentioned in this article.

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