How Low Can J.C. Penney Go?

Shares of J.C. Penney (NYSE: JCP  ) hit a 52-week low on Tuesday. Let's take a look at how it got there and see whether cloudy skies are still in the forecast.

How it got here
If I didn't know any better, I'd almost guarantee you that if you looked up the definition of Murphy's Law in a dictionary, J.C. Penney's logo would be right next to it.

J.C. Penney has been losing market share to Macy's (NYSE: M  ) and Nordstrom (NYSE: JWN  ) for years. The company had been relying on steeper discounts to drive customer traffic, which ate into margins and gave it little room to grow and compete with the aforementioned mall anchors.

Rather than go down the same path, Penney's management went outside of the box and hired the mastermind behind the Apple retail store concept, Ron Johnson. When Mr. Johnson was an executive at Target (NYSE: TGT  ) in the mid-1990s, he reinvigorated its previously stagnant growth by introducing brand-name apparel at a discount and turned it into a viable competitor to Wal-Mart (NYSE: WMT  ) . At Apple, he transformed the computer company into arguably one of the most impressive retail forces in the world.

However, the actual results from Penney's recent quarter were absolutely dismal. Same-store sales figures plunged 18.9%, it suspended its dividend indefinitely, and it reported an adjusted-loss of $55 million. Most of this weakness can be traced to Penney's new pricing strategy which involves abandoning heavy discounts in favor of everyday low pricing with clearance events on the first and third Fridays of each month. After decades of offering discounts, many consumers are simply avoiding J.C. Penney or misunderstanding its new pricing practices.

How it stacks up
Let's see how J.C. Penney compares to its peers.

JCP Chart

JCP data by YCharts.

I bet you never expected Wal-Mart to be that much of an outperformer in this group over the past five years. You can also see just how poorly Penney has performed relative to the group.

Company

Price/Book

Price/Cash Flow

Forward P/E

5-Year Revenue CAGR

J.C. Penney 1.4 27.4 10.0 (2.8%)
Macy's 2.6 6.9 9.8 (0.4%)
Nordstrom 5.0 9.5 12.8 4.9%
Target 2.4 6.9 11.8 3.3%
Wal-Mart 3.3 8.5 12.7 5.1%

Sources: Morningstar and author's calculations. CAGR = compound annual growth rate.

So how many of you predicted Wal-Mart would be the fastest-growing stock of this grouping over the past five years? My guess is fewer than 5% of you. It's not hard to see why Wal-Mart -- which in the other retailers' defense carries a wide variety of products in addition to apparel -- is able to attract shoppers of all tastes and grow its business in any economic environment. Target is doing what it can to catch Wal-Mart, but concerns regarding the credit quality of its customers have tempered its recent growth.

Nordstrom shows that while growth in the retail sector doesn't come cheap (with price-to-book ratio of 5), luxury buyers are willing to step up and spend even in the face of economic weakness. Even Macy's, which does show a dip in total sales over the five-year period, has consistently grown same-store sales in recent months and has cornered the mall-based mid-tier price point between J.C. Penney and Nordstrom.

J.C. Penney might be the cheapest on a book value basis, but its sales have been trending almost constantly lower since 2007 and its cash flow has shrunk dramatically. Cutting its dividend out of the equation saves the company $175 million annually, but comparatively, it's no better value than any of its peers based on these metrics.

What's next
Now for the $64,000 question: What's next for J.C. Penney? The answer is going to depend on whether Ron Johnson's actions can get consumers back into the stores again, if its new pricing strategy can be conveyed in an easy-to-understand manner, and if it can ultimately control its expenses as sales continue to fall while the new plans are implemented.

Our very own CAPS community gives the company a dreaded one-star rating (out of five), with 30.1% of members expecting it to underperform. Although I've yet to make a CAPScall on J.C. Penney in either direction, I've mentioned on a few occasions that I'd lean more toward an outperform call than an underperform call merely because of Ron Johnson's presence.

The key thing to remember here is that turnarounds take time and they are often unpredictable. We saw that last quarter with sales crashing through the floor. Ultimately sales will find a floor and customers will acclimate to Penney's new pricing strategy which should produce steadier and healthier margins. I'm not saying J.C. Penney may not head lower from its current levels, as there's little in the way of good news to support the stock, but I've also learned that Ron Johnson is an innovator I dare not bet against over the long run.

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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple, as well as creating a bull call spread position in Apple and a diagonal call position in Wal-Mart. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 13, 2012, at 12:06 PM, TheeMadCatte wrote:

    Ron Johnson has shown he is out of touch with what was the average JCP customer, and even more disturbing, with the general direction of the mass market retail industry he is a part of. It was easy to sell Apple products, as they are differentiated and premium products; mass market clothing, housewares, and the like are a different story. Yes, customers are trained to rely upon coupons and discounts, but that is where we are as an economy. He has turned off his core customers with confusing and insulting marketing and has failed to attract new trendy customers because let's face it, JCP is NOT a trend maker. Unfortunately for JCP, Ron Johnson has done what may be mortal damage to this company's reputation in its market segment, and it may not be able to survive.

  • Report this Comment On June 13, 2012, at 12:25 PM, TrackUltraLong wrote:

    TheeMadCatte,

    I definitely agree with you that J.C. Penney isn't and never has been a trendmaker.

    However, in Ron Johnson's defense, he did transform Target from a situation similar to the one J.C. Penney is in now into a prime competitor to Wal-Mart. That transformation took time just as its current revamp will take a few quarters before it bottoms out.

    The new pricing policy is better for the company over the long run as it'll provide higher, more consistent, margins. But the ads that came out shortly after they changed the pricing policy were confusing to many. Management is beginning to address that now so I don't see that being an excuse beyond next quarter.

    I still say Ron Johnson can turn this company around. It'll never be a Macy's or Nordstrom, but it still has the potential to take lower-tier price point customers from Macy's... I mean where else are they going to go? Sears?

    TMFUltraLong

  • Report this Comment On June 14, 2012, at 10:21 AM, FutureMonkey wrote:

    Johnson is creating free media buzz with JCP's advertising and spokesperson choice. I think he is going after Target's consumers head on. Rebranding JcP as a trend maker isn't easy, but I believe choosing Ellen a winning brand maker Ellen is a trend maker for women of a certain age. My wife of 20+ years has never to my knowledge set foot in a Penny's and is a committed Target-a-holic, said to me earlier this week...maybe we should start shopping at JCPenny's after reading a post on her facebook page. If they show up on her parenting blogs and Living Social it is all over, my wife would convert in a heartbeat.

    If JcP does become the next Target...whew. If they become the next Kmart, yikes.

    I'm not buying JcP yet, but I am watching the next quarter closely

  • Report this Comment On August 13, 2013, at 10:52 PM, misterBelevedere wrote:

    JCP – I hope you take note: In real estate it is location, location, location. In Department shopping it is women’s fashion, women’s fashion, women’s fashion. You found style in the home and kitchen area however women’s clothing has NO focus, NO sex appeal, NOTHING for women to identify with. If this is not fixed all the good work in the house ware will be for naught.

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