Is This the Beginning of the End for J.C. Penney?

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J.C Penney's (NYSE: JCP  ) recent quarter may have been one for the record books, and not in a good way. In the quarter that usually means a windfall for retailers, the troubled department-store chain posted an adjusted loss of $427 million, or $1.95 per share. Without adjustments, that number jumps to $552 million, or $2.51 per share. By comparison, in the fourth quarter last year, the company lost $0.38 per share.

Same-store sales were similarly terrible, falling 31.7%, and overall sales fell 28.4% to $3.9 billion. Gross margin dropped 640 basis points to 23.8%, and Internet sales fell 34.4% to $315 million.

CEO Ron Johnson essentially ignored the numbers on the earnings call, choosing instead to highlight steps the company's taken to revamp the brand, including rolling out its shops strategy, renovating its homes department, and using mobile devices to ring up customers and track sales and inventory.

Apples and oranges
Johnson rose to fame, in part, for his success in implementing Apple's (NASDAQ: AAPL  ) retail strategy, but the two companies couldn't be any different. Apple caters to a young, hip, tech-savvy crowd. Its stores occupy the most expensive real estate in the toniest neighborhoods across the country. J.C. Penney, on the other hand, is a 100-year-old brand in decline. It targets families and an older market, and its department stores are often found in languishing malls in forgotten corners of suburbs and rural areas.

Johnson conceded that his company had learned a few things over the past year, such as that his customers like sales and discounts, which he had tried to remove in an attempt to make it a more upscale brand. The key problem here seems to be that Johnson has alienated his core customer in order to save the company, but it's difficult to see where he's going to replace the third of sales that the company's lost. Comps would have to grow 50% to get back to 2011 levels.

Cash rules everything
J.C. Penney's free cash flow for the quarter looks decent at $415 million, but $1.02 billion of that comes from reduction in inventory as retailers often stockpile product ahead of the holiday quarter. For the year, free cash flow was negative-$820 million, and total cash on the balance sheet dropped from $1.5 billion to $930 million. Its debt burden remains high at nearly $3 billion, further straining finances as interest expense cost $226 million in 2012. The company recently extended a credit facility, indicating that more borrowing may be on the way, probably at a higher interest rate, and could even lead to shareholder dilution.

The domino effect
J.C. Penney shares have fallen as much as 10% today, hitting new 52-week lows in the process, as the market reacts to news that one of its biggest shareholders unloaded a majority of its stake on Monday. Vornado Realty Trust, the retailer's second-biggest shareholder, sold 10 million shares, or nearly 5% of J.C. Penney's total shares outstanding, at $16.40. Vornado's move could be followed by other sales, as one of the company's biggest defenders, and whose chairman sits on J.C. Penney's board, seems to be backing away. Bill Ackman's Pershing Square Capital Management is Penney's biggest shareholder, with 17.8%.

Foolish bottom line
J.C Penney bulls clearly see the company as a turnaround or a value play, but, amazingly, shares aren't even that cheap. At a price-to-sales ratio, one of the best valuation metrics for unprofitable companies, J.C. Penney trades for $0.28 for every dollar of revenue, which is much more expensive than other broken retailers. Sears Holdings and Best Buy go for $0.12; RadioShack trades for just $0.07, and SUPERVALU has a nearly invisible P/S of $0.03. Even healthy retailers aren't particularly expensive. Macy's (NYSE: M  ) , perhaps J.C. Penney's closet rival, is valued at $0.58, and made well over $1 billion last year. Kohl's (NYSE: KSS  ) trades at $0.55 and also made more than $1 billion in profits. Industry heavyweights Target and Wal-Mart are valued in a similar range.

The reason is simple. Retail is a low-margin business. Even successful retailers rely on high volumes to make up for low profitability, so sales are valued relatively cheaply. J.C Penney, then, still seems as if it has plenty of room to fall. Johnson's aura has not worn off; there are still believers in the turnaround.

Rumors have been swirling that the CEO will be out in six months without significant improvement. Johnson notably refuses to give guidance, focusing instead on the story, but retail is ultimately a numbers game. And J.C. Penney's aren't adding up.

J.C. Penney has been a train wreck whose comeback always seems just around the next earnings corner, but investors are beginning to doubt if CEO Ron Johnson can weave the same magic that he did at Apple. If you're wondering whether J.C. Penney is a buy today, you're invited to claim a copy of The Motley Fool's must-read report on the company. Learn everything you need to know about JCP's turnaround -- or lack thereof -- and as a 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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