Famed money manager Peter Lynch told us executives can sell their stock for any reason, but they typically buy only for one: They think the price is going to go up!
Today I'm highlighting department store chain icon J.C. Penney (NYSE: JCP ) , which saw the COO buy more than $100,000 worth of stock. A director also bought $33,000 in stock. These aren't option grants, but rather people who are putting their own money on the line, buying shares at market prices just like you and me.
Although following the lead of insiders can be profitable, I still recommend you do further due diligence to determine whether this stock would make a good addition to your own portfolio. So this isn't a call to buy, but just the inside track on a company you might want to check out further.
Putting your money where your mouth is
If there's one thing the department store chain has proven itself adept at lately, is turning off its customers. When CEO Ron Johnson decided to eliminate the door-buster sales and discount coupons that had been a mainstay of the retailer in favor of the everyday low-price model, customers fled in droves. J.C. Penney reported losses over the first two quarters of 2012 as sales dropped 20% in the first quarter and another 23% in the second. Comps were down 19% and 22%, respectively, and Internet sales were off 28% and 33% over the first and second quarters, suggesting the condition is getting worse, not better, and the malaise is spreading to other parts of the business.
The problem is that J.C. Penney isn't Wal-Mart (NYSE: WMT ) , where customers turn to get rock-bottom prices at all times. Customers aren't convinced the retailer is offering the best deal, particularly when Macy's (NYSE: M ) and Kohl's (NYSE: KSS ) are able to regularly entice them in with an advertising blitz. Sales at Macy's were up 4% last quarter as were comps, with Internet sales up a whopping 34%. Profits surged 43%. Kohl's saw slightly weaker sales, but nowhere near the wholesale abandonment by customers that Penney's suffered.
Race to the bottom
Sadly, J.C. Penney is metamorphosing into a glorified Sears Holdings (Nasdaq: SHLD ) , which itself has dwindled to a shell of its former greatness as customers fled to other retailers. Once that meant shopping at Penney's, but not anymore. Surprisingly, though, its stock has bounced 27% off its recent lows, but if it continues on as it's been going and sticks to its plan, those gains won't hold.
Though it's not written anywhere -- sort of like not criticizing the president when you travel outside the country -- former company executives typically don't criticize their replacements, at least not in stark, harsh terms. Yet former Penney CEO Allen Questrom recently pointedly questioned the path Johnson has put the department store chain on, calling the plan a "failure" in a CNBC interview and saying, "Johnson may believe in the everyday low price strategy but the customer doesn't."
Rather than roll out the strategy in stages, testing whether it would actually work, Johnson made it companywide policy. It would seem that until the plan is scrapped, or Johnson is replaced if he's intransigent about it -- "I am completely convinced that our transformation is on track," he was recently quoted as saying -- it's hard to see Penney's transforming itself into anything but a has-been retailer.
A pocket full of lint
J.C. Penney trades at 16 times earnings estimates, more richly valued than either Kohl's, Macy's, or Dillard's, and now it's burning through cash like a wildfire.
Certainly investors want to give a retailer a chance to fine-tune a strategy, and certainly a quarter or two might not be enough for a comprehensive analysis of whether a plan will be successful. Had the quarterly results been flat or even slightly improved, we might be will to cut Johnson and Penney's some slack, but as the situation is becoming more aggravated, and as it puts in place other initiatives that haven't sat well with customers, it seems clear a change will be needed.
Penney for your thoughts
I had previously rated J.C. Penney on CAPS to underperform the market, and I won't be changing that position any time soon. My catalyst for closing out that CAPScall will be recognition by the company the everyday low price strategy was an unmitigated disaster or the board comes to its senses and ousts the CEO.
Let me know in the comments box below if I'm being too harsh on the retailer, particularly in thinking the COO may have just thrown $100,000 in good money after bad.
On the inside track
Hey, retailers everywhere are facing tough times as consumer spending becomes constrained, but there are a handful of retailers actually growing revenues. The Motley Fool has found two cash kings that are banking on the changing face of retail. Download the free report today, which highlights two companies that will replace Wal-Mart as the king of retail.