5 reasons to skip the J.C. Penney comeback
Retail as a whole is getting pressured, and the company itself is still unprofitable.
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.
More from InvestorPlace
- 5 crash-proof dividend stocks to buy
- 4 (more) industries Google could dominate
- Marijuana stocks could be scams: SEC watchdogs
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.
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!!
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.
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.
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 !
Copyright © 2014 Microsoft. All rights reserved.
These hot movers could rise by double digits in coming months.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.