In 1963, J.C. Penney Co. Inc. (JCP, Financial) released the first direct-to-consumer model with a mail order catalog. It is unfortunate the company did not figure out the benefits of the internet sooner despite launching its own e-commerce platform the same year as Amazon.com Inc. (AMZN, Financial). Instead, it has struggled to produce any significant traction online.
In-store troubles continue to mount for the 100-year-old company. The second quarter of this year, J.C. Penney closed as many as 127 stores, with more likely to come, and comps fell 1.3%. The company owns over 300 stores worth between $2 billion and $3 billion. However, those assets are tied to a term loan, which could wipe it and the company's intangible assets out.
The company has 875 locations generating over $12 billion in sales with a 35% gross margin. Over the past decade, however, the company has tried to reinvent itself, spending a ton of money to do so, leaving it with a lot of red ink on the books.
Revenue has declined from $19.8 billion, book value has dropped $23.93 to $3.72 and the company has suffered losses every year since 2012. Short selling has risen and now stands at 42% of total shares. The enterprise value is close to $5 billion, most of which is debt.
2017 will be another disappointing year for J.C. Penney as it lowered guidance yet again to just pennies (pun intended) from 40 cents to 65 cents. CEO Marvin Ellison had this to say:
“Based on the encouraging results from a third quarter reset in women’s apparel, which expanded our casual and contemporary offering, we made the strategic decision to accelerate a wider transformation of the entire women’s department by clearing slow-moving inventory primarily in women’s and other apparel categories. Following this comprehensive reset, we saw an improvement in performance, particularly in our women’s division, confirming these actions were necessary to drive growth in our women’s apparel business.”
To be fair, at this point any positive financial numbers could result in a lot of short coverage.
From a consumer standpoint, the retail industry has never been better. Spending is at record levels. Product variety and lower costs continue to drive sales across the industry. Since it is easier to reach customers, competition is intensifying.
As a whole, e-commerce still only accounts for 9% of retail sales, which means there is a massive opportunity for retailers to adjust and evolve. Will J.C. Penney be one of them? It is doubtful, but if you are looking for a turnaround story, there would not be any better than J.C. Penney. Seeing this company come back to glory would be special.
This is not a value investment. J.C. Penney has no economic moat and zero brand power. On the other hand, the company’s situation does not involve a significant drop in comparable store sales like other retailers. Its death is not imminent, which means the company still has the ability to come back. The stock is worth a flyer, if nothing else.
Disclosure: I am not long or short JCP.
