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Why J.C. Penney Can't Be Saved

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Regardless of CEO Ron Johnson's impressive resume, J.C. Penney (NYSE: JCP  ) simply can't be saved. The retailer's current situation is like hiring the Apple executive to make a corded rotary phone cool again. You can try, but it's highly unlikely it will happen; everybody's moved on to better, cooler options, which don't require being tethered to a wall or getting a busy signal.

Investors would do well to actively avoid investing in this stock on its current weakness. There's good reason to believe it's got nowhere else to go but into history books.

Betamaxed and VHS'ed
J.C. Penney shares are plunging today on fourth-quarter results that can only be called abysmal. Penney reported a net loss of $552 million, or $2.51 per share. Total sales plunged by 27% to $3.88 billion, and its all-important same-store sales number dropped a mind-boggling 32%. That's during the holiday season, folks, when most retailers have the best shot at capitalizing on a consumer frenzy.

To his credit, CEO Ron Johnson is owning up to "big mistakes." These include the customer-confusing pricing disaster, teeter-tottering from banning big promotional sales to push consistently straightforward pricing, then moving back to throwing blowout sales.

Regardless of whether the retailer's red-lining merchandise or not, Johnson still faces a basic conundrum: reviving an antiquated brand. It's like trying to fix up an old PDA you found in the closet to sell it as a cutting-edge product while everyone looks up, confused, from their whiz-bang smartphones.

J.C. Penney's "store-within-stores" sounds like a potentially great idea, but it's not alone in that approach. Although management has said that these shops -- which include brands like Sephora and last year's added Levi's, are outperforming the rest of the stores, let's face it: That's not hard to do, and so far, it's obviously not nearly enough.

Target (NYSE: TGT  ) has also been opening up similar boutiques within its stores, but the big difference is that Target simply has a far stronger and more contemporary brand to begin with. Adding more exclusive boutiques inside Target stores fits well within the brand. Target doesn't rely on such innovations; they simply help differentiate it from other strong competitors (which do not include J.C. Penney).

Avoid the anachronism play
Retail turnarounds are incredibly difficult to achieve, particularly when almost every direct rival has a better and more distinct advantage. Target is still cheap-chic and its brand hasn't taken a drubbing, and Wal-Mart is still well known for its low prices. Costco (NASDAQ: COST  ) attracts a more affluent demographic with low prices and carries an always-changing array of brands, often high-end.

None of these discount retailers faces the monumental task of trying to re-create themselves to escape from their own existing (and failing) brand identities.

Hedge fun manager Bill Ackman owns a stake in J.C. Penney, and has been defending the retailer's leadership, efforts, and long-term viability, but remember: Ackman similarly defended Borders for years leading up to its bankruptcy and liquidation. That's no reason to bottom-fish for J.C. Penney shares.

Investors who are looking for more solid retailers within the space would be much better served to simply buy shares of Costco, Target, or even Wal-Mart. J.C. Penney looks like a horrible stock idea.

Last but not least, let's talk about Johnson's previous employer. If investors are currently flipping out about Apple's future, even though that company retains an incredibly strong brand and popular products, even factoring in current concerns, then why the heck would anybody take a chance on J.C. Penney? Apple shares are a better idea for a "cheap" stock right now. After all, products like the iPhone and the Mac aren't anywhere close to being the equivalent of the dot-matrix printer gathering dust in the attic.

Cue up the old adage: Buyer, beware. Anachronisms don't make good investments.

A better alternative in retail?
Costco's low prices haven't just benefited customers -- shareholders have walloped the market, returning 11,000% over the past two decades. However, with prices near all-time highs, is the ride over for Costco investors? To answer that and more, we've compiled a premium research report with in-depth analysis on Costco. Simply click here now to gain instant access to this valuable investor's resource.

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Related Tickers

9/29/2016 12:55 PM
JCP $9.43 Down -0.12 -1.26%
J.C. Penney CAPS Rating: *
COST $147.77 Down -1.64 -1.10%
Costco Wholesale CAPS Rating: ****
TGT $67.81 Down -0.01 -0.01%
Target CAPS Rating: ***