5 reasons to skip the J.C. Penney comeback

Retail as a whole is getting pressured, and the company itself is still unprofitable.

By InvestorPlace May 20, 2014 3:28PM

Credit: © Justin Sullivan/Getty Images
Caption: A customer enters a J.C. Penney store in Daly City, Calif.Updated May 21, 2014


By Jeff Reeves


J.C. Penney (JCP) gapped up more than 16 percent on Friday on strong earnings and hopes that the retail stock's long-awaited turnaround is at last underway. Shares have steadily fallen back since then, and Wednesday were down nearly 2 percent to $8.77.


For its recent quarter, J.C. Penney reported a narrower loss on net sales of $2.8 billion versus $2.64 billion a year ago, with same-store sales increasing 6.2 percent year-over-year and even rising sequentially over the previous quarter. This is a big deal, since a big reason the stock crashed and burned in 2012 and 2013 was crumbling same-store sales.


J.C. Penney shares have exploded higher as a result, no doubt as a result of short sellers running for the exits; while total short interest in the stock had fallen from a peak of 62 million shares in September 2013 to just 16 million or so at the end of April, volume had also declined enough that the ratio of trading days to cover that interest spiked to 5.6 days -- the second highest measure since July.


But as the shorts wash out, the question remains: Are there any investors gutsy enough to go long in JCP stock and hang on for the ride?

If there are, they are going to get a rude awakening after this initial pop fades because J.C. Penney is still in deep trouble. Here's why:

  • It's still unprofitable. Although J.C. Penney did post a narrower loss the quarter than it did a year earlier, it remains deeply unprofitable. In fact, the company isn't expected to post a quarterly profit at any point through the end of fiscal 2015, according to Standard & Poor's forecasts. That means the company has an infinite forward P/E ratio, since profits don't exist -- something to remember before you talk about JCP stock being a bargain.
  • Cash crunch remains. Along those lines, the stock remains pressured by its balance sheet and any money it has will be earmarked for stabilization -- not growth. In April 2013, Goldman Sachs (GS) loaned J.C. Penney $1.75 billion, then the company raised more than $800 million in secondary offering. But those tricks cannot be repeated, and with the company still unprofitable and saddled with long-term debts that are twice the total market cap . . . well, it's not looking good for investment in growth or returning capital to shareholders via big dividends or buybacks.
  • Stores still old and unattractive. The big problem facing J.C. Penney is that, like its troubled peer Sears (SHLD), the locations are largely older and unattractive mall anchors that aren't as appealing to most consumers. Retail analyst Brian Sozzi of Belus Capital Advisors advocates a "boots on the ground" strategy where he visits actual store locations to view how items are stocked, how employees treat customers and what the general shopping experience is like, and he has long maligned JCP stock as one of retail's worst offenders when it comes to look and feel. With no profits and no cash to spend, how can J.C. Penney correct this in the long term?
  • Broadly, retail is crumbling. As I wrote recently, retail sales rebounded in March but crumbled again in April. Those expecting the warmer weather to usher in a big rebound in retail and consumer spending could be in for a lot of disappointment given the ugly April numbers and anemic GDP stats recently. Also, look at Wal-Mart (WMT), which posted not just poor earnings but poor forward guidance as a sign of how trouble in the sector should continue.
  • Remember Best Buy's "comeback"? J.C. Penney's stock still is down more than 60 percent in two years, and about 50 percent in the last 12 months. This is a classic dead-cat bounce where overzealous shorts have abandoned ship -- but aside from swing traders who have already made their money, the rest of us should simply be sitting this out. Does anyone really think JCP stock has another double-digit pop in it anytime soon? And even if it does, Best Buy (BBY) has showed us what happens once the comeback narrative crumbles; BBY stock jumped 245 percent in 2013, then crashed 40 percent in short order. You better be darn sure you have further upside in J.C. Penney before you buy, or else you could get all of the downside volatility with none of the gains.
Kudos to the traders who got in to J.C. Penney's stock before this recent pop. But don't expect the recent big gains to result in any long-term uptrend for the company.


More from InvestorPlace

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not own a position in any of the stocks named here.

154Comments
May 20, 2014 7:33PM
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The problem with this kind of story is they are not talking about the quality of the product, they are talking about the stock predictions; JCP is a good store, and I'm surprised some rich guy doesn't buy it and take it private; they will make money in the long run as long as they don't have to worry about quarterly stock reports and just have to differentiate themselves from their competitiion - in my opinion they have product quality nearer to Macy's, but prices nearer to Target's.
May 20, 2014 10:31PM
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JCP is a nice store--it's very cleanly laid out. They don't cram as much 'stuff' as they can into the stores. I just don't understand, in this economy, how JCP is losing '20 percent' of sales over the past year or so but Neiman Marcus gains 20 percent. How can that many people afford to pay for NM's items? Some of their clothing, shoes, etc. is grossly overpriced. JCP has numerous sales--T-Shirts for $5???? I hope someone/something can 'save' JCP--would hate to see another anchor store leave the malls.
May 20, 2014 7:56PM
May 21, 2014 9:24AM
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Geez MSN lighten up on JCP. They are a good place to buy clothing. Maybe you should try them...
May 20, 2014 11:39PM
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Why does MSN always write negative stories about JCP, McDonald's , Walmart and Bank of America ?
May 21, 2014 9:12AM
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The constant "negative" articles written about JCP, Sears, Kmart, etc. cannot be good for business.  People are easy to persuade and if you keep hearing the same thing you might also stay away from these stores.  I am not saying they don't have issues with business but the bad publicity certainly is not going to increase sales.
May 20, 2014 11:33PM
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J. C. Penney's is a really nice store as we shop there regularly along with Kohl's, Macy's etc. JCP will rebound as middle American shoppers buy there and were "turned off" by Johnson's remake of the retailer - re: no sales, no coupons, etc. And they paid him a sign up bonus of over $50 million....what a catastrophic error of the board.


Any way - the real profit potential is when Sears finally fails which seem to eminent - once that occurs, JCP will fill a large void in retailing and capture significant market share.....then the stock could go back to $75. JCP could very well be the next 10-bagger!! 


JCP rocks!!

May 21, 2014 12:01PM
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Unattractive?  Personally, I find JCP stores VERY pleasant places to shop.  Many other stores have tried to make their stores more "attractive;" they ended up with gaudy eyesores that I wouldn't shop in if they were the last store on earth.  Sometimes the old-fashioned, classic look is just the look you need. 
May 20, 2014 9:15PM
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I went to work for Sears when it was their 75th year in business in the catalogue division. The early 1960's. They were a full service store from clothes, shoes, undies, appliances, auto parts, paint, lawn and garden, jewelry and everything in between. growing like crazy and opening retail outlets all over the country. Things looked good because they were one of the only full service retailers. What happened? Competition drove shoppers away because they lost direction of the changing shopper. They dropped catalogue sales at a time internet shopping was in it's infancy. Carry the same soft lines today and the same quality as many other chains. Their mainstay was and still is appliances and lawn and garden. Until they decided to have Craftsman tools made overseas, they were a home and professional choice. Sears is almost gone, as is Penny's. Montgomery Ward, Woolworths, WT Grant, Kresge (K Mart) and Zayre to name a few died because management had no idea the retail climate was changing. Simply put, if you are a me too, I can shop anywhere. 
May 20, 2014 9:10PM
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it is all about  the stockholders and the buck .....do u think that these comp really care about the
consumer     any more than the gov cares about us
May 21, 2014 9:53AM
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I love  JCP and I love shopping there. 
May 21, 2014 12:16PM
May 21, 2014 9:55AM
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This writer doesn't have a clue...and neither does JCP.  My husband used to say to me, "JC Penney loves you", every time we received a flyer with coupons.  I used the coupons to buy higher priced gift items that were beyond my normal budget.  HOWEVER, the last few times I tried to buy something, I was stopped by the ever-growing "exception" rules on the coupons.  Lamenting that I now need an attorney to decipher the restrictions.  Reminds me of Steve Martin in "The Jerk" at the carnival...you can win any of this...except on these rows, between these 2 items, but not this one,....


To make it worse, the signs on the floor are inconsistent.  Last week I went to buy an item and the cashier said the coupon wasn't any good because the blouse was a "Bonus Buy".  But the rack on the floor didn't have a "Bonus Buy" sign.  I put the top back and went looking again.  Went to the cashier and was told the same thing - AGAIN!  Other customers were confronted with the same issue...to the point that the cashier called the store's office and reported the problem, acknowledging that it was an "ongoing problem".


Guess what...JC Penney may "love me", but I don't love them anymore.  It's a horrendous hassle to shop for a gift, only to find it doesn't "qualify"...try again...try again...try again.  No thanks.  Future shopping will be done elsewhere.  

May 21, 2014 7:56AM
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JCP like Sears discontinued their catalogs because sales through the catalogs weren't very profitable. The problem is I used the catalog to scan through what I'd like and then go to the store buying several thousands of dollars in tools a year at Sears and usually bought clothes at JCP even using them for the kids to give me an idea of what they'd like for Christmas. The catalogs made them special now that they've discontinued them I haven't shopped at either in years.
May 21, 2014 12:22PM
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we love jcp...weren't too crazy about the recent changes in stores though...one BIG tip...my last purchase 2 weeks ago i couldn't get anyone to ring up my sale...each register counter i walked up to had foreigners standing around talking to each other NOT ONE would greet me or ask to ring up sale they just avoided eye contact as much as they could...finally i went to another dept. and found someone to take my money but had to go through quite an interrogation about using or signing up for a jcp credit card...the tip is get rid of clerks who ignore customers...this could appeal to their loyal cust. and probably get them some new cust.
May 21, 2014 8:21AM
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JCP doesn't listen to it's customers, and they've driven many long-time customers away.  Plus the quality of their merchandise has really dropped, especially in women's clothing.
May 20, 2014 10:25PM
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In my town our Mall was great. when it was built. Stores built around this mall because of the mall. They sold it several times and it went down thru the years. Slowly stores left because the mall deteriorated and little maintenance was done
May 21, 2014 9:52AM
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JCP used to have great merchandise, it was on par with Belk. Now some of their products look cheap. I used to shop Penneys all the time, we don't have any in our area so I can't. We did have an outlet store in our mall, but they closed it. I do hope it can survive, but it doesn't look promising. On-line shopping is killing the malls and independents. I, personally, want to go and see what I'm buying before I spend the money. Especially with clothes and shoes, I want to know that they fit.
May 21, 2014 10:39AM
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nobody listens to there customers today.  look what happen yesterday 5/20/2014 the old CEO of Target got over $15 million dollars after taxes and stocks.

We need to go back how are grandparents did it and make are own stuff, and show these fat asses we don't need them any more.    But on to JCP they are the only ones that really care about tall men or lady's.  The rest of the stores think we are still in the 60's and people are the same size.

I'm almost 7'0 foot try and find clothes in any other store.  They tell you go on line, right there the customer service lady answered the problem to the future of a lot the stores out there.  You can buy everything on line today. 

May 21, 2014 12:31PM
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Maybe before you write these comments you should visit a JCP store!!  They have all been updated,

and  look better than Macys, NM. Their employees go out of their way to help you and the sales everyone missed are back. MSN needs to lay off JCP !

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