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J.C. Penney Is Turning Itself Around, but Stiff Headwinds Exist

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J.C. Penney (NYSE: JCP  ) is one of the most hotly debated stocks on Wall Street. The bullish argument is that customers are slowly returning to J.C. Penney stores and CEO Mike Ullman has the company headed in the right direction. The bearish argument is that too much damage has been done, the brand has been tarnished, and a sustainable recovery is a near impossibility. After looking at some key numbers and trends, the answer seems to be somewhere in the middle.

Recent Results
In the second quarter, net sales came in at $2.66 billion, moderately lower than the $3.02 billion delivered in the year-ago quarter. Comps declined 11.9% year over year, mostly due to failed merchandising and promotions, markdowns, renovations, and an ineffective remerchandising of the Home department. The bears would be smiling right about now, but a positive trend also exists. 

For instance, comps increased 470 basis points sequentially, and overall sales improved in each month of the second quarter. J.C. Penney expects this trend to continue in the second half. Therefore, it's possible that CEO Mike Ullman's fixes are in motion.  

Industry Trends
Retailers and consumers go hand in hand. If the consumer is weak, then there's little hope for most retailers. J.C. Penney could limit the damage with promotions, which may attract value-conscious consumers, but industry trends are still more powerful than any promotion. Currently, there are several issues to worry about.  

The housing market plays a big role in consumer confidence. When housing prices appreciate, homeowners feel wealthier and they spend more. Housing prices only appreciate when demand is high. Over the past few years, extremely low supply and historically low mortgage rates have driven demand higher. Currently, however, the 30-year fixed mortgage rate stands at 4.69%, considerably higher than the 3.53% rate in January. As mortgage rates continue to creep higher, fewer people purchase homes, and home prices retreat. This, in turn, leads to a weaker consumer, a headwind for J.C. Penney and retail in general. 

Then there's underemployment. The economy added 169,000 jobs in August, and the unemployment rate fell to 7.3%. However, what most people don't pay attention to is that the July number for jobs added was revised down to 104,000 versus the original report of 162,000. And, as you might already know, labor force participation continues to decline. Once again, this will negatively impact the consumer, which will then limit potential for J.C. Penney. In addition to these headwinds, consumers must contend with high gas prices and a 2% increase in the payroll tax.

J.C. Penney vs. Peers
Given these headwinds, let's see how J.C. Penney stacks up against its peers.  

J.C. Penney is like Kohl's (NYSE: KSS) in that it offers a broad array of brands and products at discounted prices. However, J.C. Penney is more often brought up in conversation with Macy's (NYSE: M), which had been a Wall Street darling up until about one month ago.

Macy's is known as a top-notch retailer because of its strong fundamentals and its ability to appeal to almost every consumer. But it recently missed earnings expectations for the first time in six years. This, combined with Wal-Mart's warning of a weakening consumer is concerning for retail as a whole. Macy's stock has paid the price, depreciating 8% over the past month, at a time when J.C. Penney's stock appreciated nearly 10% on turnaround hopes. This is the complete opposite of what took place over the past five years.

JCP Chart

JCP data by YCharts

If you're beginning to favor J.C. Penney over Macy's, don't get too excited just yet. While J.C. Penney has more upside potential on a turnaround, it's not nearly as stable as its peers.

JCP Revenue TTM Chart

JCP Revenue TTM data by YCharts

Earnings trends haven't impressed either: 

JCP EPS Diluted TTM Chart

JCP EPS Diluted TTM data by YCharts

Also, J.C. Penney has a debt-to-equity ratio of 2.51 versus much healthier debt-to-equity ratios of 0.76 and 1.18 for Kohl's and Macy's, respectively. These healthier fiscal positions also allow Kohl's and Macy's to pay dividends. They currently yield 2.7% and 2%, respectively, whereas J.C. Penney doesn't offer any yield.

J.C. Penney is likely to improve, but not enough to consistently grow during such a difficult macroeconomic environment. Expect a lot of ups and downs. If you want to roll the dice, it can be looked at as a good speculative play. If you're looking to invest in more financially stable operations and like to collect dividend payments, then Kohl's and Macy's will be better options. That said, none of these names may be resilient if the consumer weakens. 

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Read/Post Comments (3) | Recommend This Article (1)

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 September 16, 2013, at 5:59 PM, alboy5 wrote:

    I bought a couple of shirts at jcp at a very low price.

    I have experience a few deals at Penneys.

    I am going to go to Penneys this week, there probably is kind of a fire sale going on with many of their brands being abandoned by CEO Ullman.

  • Report this Comment On September 16, 2013, at 10:02 PM, EESNAS wrote:

    I have been shopping at Penneys for about 40 years and the quality of their clothing is every bit as good or better than the higher end retailers. I definitely plan on continuing buying all my clothing there. All my kids wear JC Penneys clothes.

  • Report this Comment On September 17, 2013, at 11:11 AM, Postitonline wrote:

    In my hometown, JC Penneys used to be the ideal place to shop even though in my opinion, the prices were too steep for me. This store had the most beautiful everything ranging from Clothes to Kitchen Appliances to Bed Clothes. I don't know what happened, but something happened over the years. When I came home earlier this year, JC Penneys was one of the first stores I visited. I was and still am in total shock at this store. The merchandise reminds me of a Dollar Store, as a matter of fact, the entire store reminds me of a Dollar Store. I was flabberblasted. I loved JC Penneys, but now I avoid Penneys. I don't know what happened, but they need to go back to the old Penneys and put the GOOD MERCHANDISE AND MORE OF IT inside the stores. Then maybe, just maybe the customers will be forgiving and come back and shop again.

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Related Tickers

9/30/2016 4:03 PM
JCP $9.22 Down -0.03 -0.32%
J.C. Penney CAPS Rating: *
KSS $43.75 Up +0.95 +2.22%
Kohl's CAPS Rating: **
M $37.05 Up +1.00 +2.77%
Macy's CAPS Rating: **