Holiday Sales Won't Save This Retailer

Retail sales are important, simple as that. Investors, take note: You have an advantage if you understand what the consumer is doing before anyone else in the market does. Strong reports for retail sales are favorable for stocks and bearish for the bond market. I'm especially interested in sales figures over the holiday season to give insight on how 4Q numbers could shape up for retailers.

While the numbers are up abroad, department stores seem to be lagging behind, with Macy's (NYSE: M  ) and Kohl's (NYSE: KSS  ) reporting same-store sales declines of 1% and 5.6%, respectively, in November. Let's take a look at survey trends that should worry department stores hoping for a strong ending to the holiday season.

Digging into the numbers
The National Retail Federation released a survey last Thursday that highlighted some negative trends.

  • 11.3% of shoppers have already finished shopping for the holidays, an increase from 7.6% this time last year.
  • Those still shopping have completed 57% of their holiday purchasing, the highest percentage in the survey's 10-year history. 
  • 11.2% of shoppers responded that they hadn't started holiday shopping yet, compared to 16.5% last year. 

This shouldn't be a surprise. Every year, we've watched as retailers compete with one another to have the earliest deals to entice the Black Friday crowd. With two very important weeks of retail shopping left, stores face a tough task of luring consumers back to save their holiday season. Let's check into three department stores and see how they're battling for consumer spending.

J.C. Penney struggles
J.C. Penney (NYSE: JCP  ) sales have plummeted 26.1% in comparable store sales for the 3Q. It's struggling on all fronts, with Internet sales decreasing 37.3% from last year. One reason for Penney's struggles has been the competition and success of other department stores such as Macy's and Kohl's.

Macy's has beaten analyst expectations for the last six quarters in a row and has given management confidence that it can finish the year with strong top-line growth, raising guidance for yearly EPS by $0.05. Macy's is giving Penney's a lot of competition for clothing sales, and is much more confident in sales figures going forward. To maximize its profits for the last-minute shoppers, it's extending store hours so that it will be open for the last 48 hours on the last weekend before Christmas.

Kohl's is doing its best to attract more customers from a different angle. It's offering a hassle-free return policy, where customers with receipts are eligible for a full refund and those without receipts can get credit toward anything in the store. Kohl's will stand by the sale at any store across the nation, and the move gives holiday shoppers a lot of incentive to purchase gifts there.

More online sales
Competition is tough among department stores with sales promotions and discounts. Not only does Penney's face competition from Macy's and Kohl's and other brick and mortar operations, but also from online juggernauts Wal-Mart (NYSE: WMT  ) and Amazon.com  (Nasdaq: AMZN  ) . For the first time, more than half of shoppers say they will use the Internet for gift buying this season, the highest on record.  The latter online retailers also extended free shipping an extra day -- guaranteed to arrive by Christmas -- to Dec. 18. This season, online sales are up 13% to $29.3 billion, and isn't a trend likely to switch into reverse. Look for Wal-Mart and Amazon to continue to take sales from such brick-and-mortar stores as Penney's.

Identity crisis
In addition to awful sales numbers and fierce competition, Penney's has been having an identity crisis of late by completely changing its strategy from big advertised sales to everyday low prices. This strategy hasn't been well received by consumers or investors, and it seems Penney's is backing off by offering advertised sales.

Penney's also has an identity crisis with its stores in general. New CEO Ron Johnson plans to keep renovating stores and what those stores represent as a shopping experience. Johnson's vision is to create a more enticing and friendly atmosphere to keep customers in the store for longer periods of time, thereby increasing sales. Penney's would house dozens of mini stores that offer other services, in addition to free in-store Wi-Fi.

Can Johnson pull off his magic for a third time? So far it looks promising. In the renovated stores, which represent a small percentage thus far, sales are up 20%. With the dismal 3Q reports, Penney's needs holiday sales to help its 4Q report, and if it falls short, expect more investors to jump ship. I don't expect holiday sales to save Penney's, though, and I believe it will disappoint in the 4Q yet again.

That said, for value investors, there's a potential turnaround story here. Johnson offers a resume and track record to be proud of. He's the former mastermind of Apple's retail operations, and also spent 15 years at Target shaping its image to battle retail giant Wal-Mart.

Bottom line
If you're a patient investor who believes in Johnson's new strategy, you have a chance to scoop up shares cheaply. However, I'm not a believer. Penney's has had 5 consecutive quarters of negative EPS, and it has a lot of changes to make before it returns to profitability for investors. I see a declining company with a lot of competition, and there are better and safer investments in department stores, including Macy's and Kohl's.

J.C. Penney has been a train wreck whose comeback always seems just around the next earnings corner, but people are beginning to doubt if CEO Ron Johnson can weave the same magic that he did at Apple. For investors wondering whether J.C. Penney is a buy today, you're invited to claim a copy of The Motley Fool's new must-read report on the company. Learn everything you need to know about JCP's turnaround – or lack thereof – and as an added bonus, you'll receive a full year of expert guidance and updates as key news develops. Simply click here now for instant access.


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