The Nightmare Before J.C. Penney

Is there a scarier story in retail today?

Jan 17, 2014 at 9:52AM

Coming as it does on the heels of a Christmas sales update in which absolutely nothing other than happy talk was revealed, the fact that J.C. Penney's (NYSE:JCP) stock tumbled yesterday after it said it was closing 33 stores and letting 2,000 employees go is not surprising. It simply underscores the market's belief that the retailer actually suffered a significant sales slowdown at the tail end of the holiday shopping season after having built up expectations that it could defy gravity.

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In the buildup to the Black Friday kickoff of the Christmas shopping extravaganza, the troubled retailer reported an improving sales picture with third-quarter results coming in well ahead of second-quarter numbers, even though they were still below the year-ago period. It was able to staunch the bleeding seen in store traffic, while online sales were particularly robust, jumping 25% year over year. 

That was followed by an update the following month, which, while describing the turnaround as a work in progress, provided the first hint that Penney was becoming misleading about the extent to which it was complete. The numbers showed a big 10% surge in same-store sales, but neglected to include any statistical confirmation that traffic was similarly growing, and the markets worried that all might not be as it appeared.

All of which led to the latest update, wherein the retailer basically scribbled a big smiley face on its test paper and hoped that would suffice to appease investors. It didn't. By not providing anything substantive, not even a quote from the usually loquacious CEO Myron Ullman, its shares were sent tumbling on the fear the rot was returning. If the turnaround has stalled, it wouldn't be alone in its position, but it would also amount to a violation of the cardinal rule not to promise more than you can deliver.

The bottom just fell out of Best Buy (NYSE:BBY), which reported Christmas sales dropped despite steep discounts being offered along with margins that came in much worse than expected. Sears Holding (NASDAQ:SHLD) also said sales were worse this year than they were last year, despite running holiday promotions since pretty much just before kids went back to school.

I warned last month that all this promotional activity by retailers was bound to lead to a disastrous end, that it would impact margins and owning shares of a retailer when it reported results could crush a portfolio. Black Friday sales were started the week before Black Friday, stores opened on Thanksgiving Day itself, and marathon, 'round-the-clock shopping was held right up till Christmas Day. It was clear retailers were increasing their expenses with only the possibility of a limited payoff in return.

Best Buy's stock fell almost 30% yesterday on the news as it seems its own vaunted turnaround is in jeopardy, while Sears has lost another quarter of its value so far in 2014. That J.C. Penney should be joining them in the dumps is no wonder at all, though one can only hope the retailer has really just been holding its cards close to the vest in a bid to trump all the naysayers when it reports earnings. 

Certainly the retailer needs to cut costs, and the marginal store closings it announced are only a small step in that direction -- but following what has come before, from its own hands as well as that of the industry, it doesn't seem like a bet I'd be willing to make.

The ghost of Christmas past
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Fool contributor Rich Duprey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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