Will After-Christmas Sales Hurt J.C. Penney and Sears?

It's no secret that some of the best deals offered by retailers take place after Christmas. The reason why companies like Macy's (NYSE: M  ) and Toys R' Us offer their largest sales after Christmas is twofold. These sales allow companies to sell off any unwanted inventory after Christmas and entice consumers to continue spending even after pouring out their wallets and purses in preparation for the holiday season. However, for J.C. Penney Company  (NYSE: JCP  )  and Sears Holdings (NASDAQ: SHLD  ) , their after-Christmas deals could do more than affect their quarterly results; they could mean the life or death of these firms.

Macy's is leading the pack
The year of 2013 hasn't been a particularly good year for brick-and-mortar retailers. Between consumer preferences changing and shopping moving toward online ordering from places like Amazon, the sales and profits of companies like Wet Seal, Abercrombie & Fitch, and Aeropostale have suffered. This doesn't mean that times have been challenging for everyone.

Over the past few years, Macy's has succeeded in standing apart from the crowd. Between 2010 and 2013, sales at the multi-billion dollar retailer rose 17.9% from $23.5 billion to $27.7 billion. Even better, net income has jumped 305.8% from $329 million to $1.3 billion!

This trend of improved profitability has extended into the company's 2014 fiscal year with its revenue rising to $6.3 billion in the third quarter, a 3.3% improvement on the $6.1 billion it brought in during the same quarter last year. Meanwhile, the company's net income has jumped 22.1% over the same timeframe from $145 million to $177 million.

In an effort to continue this trend, Macy's has done everything it can to remain competitive, including offering attractive after-Christmas sales. The event, which is celebrating its second year, has been dubbed Macy's "Week of Wonderful" and it began on Dec. 27 and it is slated to end on Jan. 2. During this time, the company will sell a variety of merchandise at steep discounts so that it can make room for new inventory going into 2014.

J.C. Penney hasn't been doing well lately
Unlike Macy's, J.C. Penney has been a mess recently. Over the past four years, revenue at the retailer has dropped a mind-numbing 26% from $17.6 billion to $13 billion. In that same timeframe, J.C. Penney's net income has gone from $251 million to a net loss of $985 million.

Year-to-date, the situation has gotten even worse, as demonstrated by the 5.1% decline in revenue to $2.8 billion in the third quarter of this year from the $2.9 billion the company saw in the same quarter a year earlier. Likewise, the company's net loss jumped by 297.6% this past quarter to $489 million as it lost $123 million in the same quarter last year.

This decline in both revenue and profitability can be attributed primarily to a failed turnaround plan put into place by now former CEO Ron Johnson. After coming into power at the firm, he attempted to revolutionize the business by cutting out coupons and instead offering everyday low prices. Though Johnson expected this to increase business, it only served to disenfranchise its customer base.

After his ouster, Mike Ullman, the company's former CEO, stepped in and he has been working to improve operations. Currently, it's hard to tell what kind of impact Ullman's decisions will ultimately have on operations. Early results have been encouraging, with comparable-store sales rising 0.9% in October and 10.1% in November.

Sears hasn't been much better
Though Sears' results haven't been as poor as J.C. Penney's, the retailer has been experiencing a decline in fundamentals. Over the past four fiscal years, revenue at the company has dropped 9.5% from $44 billion to $39.9 billion. Meanwhile, the company's net income has dropped from $235 million to a net loss of $930 million.

Year-to-date, the situation has been getting even worse, as demonstrated by the 6.6% drop in revenue from $8.9 billion in the third quarter last year to $8.3 billion this year. Similarly, the company's net loss has widened from $498 million to $534 million.

While the deterioration at Sears appears similar to the situation at J.C. Penney, the underlying reasons for Sears' decline are slightly different. After a poorly conducted merger with Kmart in 2005, Sears began seeing its revenue decline because of financial mismanagement. This is typically attributed to Eddie Lampert's (the company's largest shareholder) belief in cost savings at the expense of investing in the company's operations. Recently, management has been striving to increase shareholder value by spinning off assets that they believe are a detriment to business, such as the recently announced spinoff of Lands' End, one of a string of spinoffs conducted by the company in recent years.

Foolish takeaway
With the picture at retailers like J.C. Penney and Sears getting worse and worse while competitors like Macy's are grabbing up market share, now could be a make-or-break moment. Though after-Christmas sales have the potential to draw in additional customers and revenue, the competitive environment is fierce. For this very reason, these struggling retailers are left with a very narrow window of opportunity to draw in customers and benefit.

On one hand, if J.C. Penney and Sears do not offer attractive sales this could serve to undermine their efforts if they don't bring in enough customers. Not only would this widen the gulf between these companies and their stronger peers, it would leave them with too much inventory on hand and potentially leave them with too little cash to invest in new inventory. On the other hand, sales that are too good could result in wider net losses, which could make investors and creditors scared that there may not be much of a next year for these companies.

While we won't know how well J.C. Penney and Sears are doing on balancing these two threats until their next reports, investors are right to be cautious. It is with this in mind that shareholders should keep a watchful eye on each company, but this does not mean to say that either is a particularly bad investment. Any indication that either company's management has successfully handled after-Christmas sales could (and should) send shares soaring.

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  • Report this Comment On January 01, 2014, at 7:21 PM, MSFInvestments wrote:

    Regarding Sears Holdings, there is much more to them than meets the eye. www.seritage.com

    Their total inventory is already paid for and they are transforming more and more to a holding company.

    What I find interesting is the open interest in the January 2015 $60 and $70 Call Options.

    Lahiem

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