Sears, J.C. Penney, and Best Buy: Buying Opportunities or Time to Run?

Sears, J.C. Penney, and Best Buy are under heavy selling pressure. Is this a buying opportunity for their stocks, or is it time for investors to abandon all hope? Sears, J.C. Penney and Best Buy are under heavy selling pressure. Are these buying opportunities or is it time for investors to abandon all hope?

Jan 22, 2014 at 3:31PM

It's a tough environment for many retailers, and some particular names like Sears (NASDAQ:SHLD), J.C. Penney (NYSE:JCP), and Best Buy (NYSE:BBY) have been particularly hit lately. Investors may feel tempted to take an opportunistic position in these companies at discounted prices. However, you get what you pay for, and things seem to be getting worse before they turn any better for these companies.

Sears keeps bleeding
Sears has been facing declining sales for several years, the company is losing money and performance is not showing any signs of a turnaround. Sears recently reported dismal sales figures for the key holiday quarter, a crucial period for department stores due to its heavy seasonal weight on yearly figures.

Comparable-store sales for the quarter ended on Jan. 6 declined by 7.4% versus the same period in the prior year. Kmart delivered a decline of 5.7% while Sears Domestic saw its comparable-store sales drop by a breathtaking 9.2% during the period.

The company has turned to cost-cutting and inventory reductions in its attempts to stop the bleeding, but this is hurting the shopping experience even more and generating additional problems on the sales front.

Store closings, like the recently announced closing of its flagship store in Chicago, seem to be a necessary evil to alleviate losses and raise some cash, but hardly enough for a sustainable turnaround.

The stock looks materially cheap when looking at valuation ratios like its price-to-sales ratio of 0.11, and there could be substantial value in Sears' real estate assets. However, there is little sign as to how or when Sears could realize the value of those assets.

As of November 2013, Sears has almost $4.7 billion in debt, so the company's financial position is certainly a considerable risk to watch. Especially considering that there is no clear strategy with a proven viability to reduce debts or increase profitability in the medium term.

Noisy silence from J.C. Penney
J.C. Penney did not provide much information regarding sales during the holiday period; the company issued a brief press released saying that management was "pleased" with performance during the holiday shopping season, and that the company was reaffirming its outlook for the fourth quarter of 2013.

Silence can sometimes make a lot of noise, and the stock immediately dropped by more than 10% after the announcement as investors did not like what that scarcity of information could mean.

For the quarter ended on November 20, the company reported a 4.8% decline in comparable-store sales. It also announced some increase in comparable sales in October, but margins remain under pressure due to low prices and intense promotions.

Like Sears, J.C. Penney continues to lose money and burning cash, and the company has not yet proven to investors that it can effectively reinvigorate sales and recover its brand image among customers.

Best Buy disappoints its believers
Best Buy had delivered considerable improvements in the previous quarters with sales trends showing signs of stabilization and cost reductions starting to bear some fruit. The stock rose by more than 240% during 2013 as some investors were starting to believe in the company's chances to implement an effective turnaround.

However, performance during the holiday shopping season was a big disappointment for investors, and the announcement sent the stock down by a whopping 23% in a single day.

Domestic comparable-store sales fell by 0.9% during the nine weeks ended on January 4. In addition, management made several references to the intensely promotional retail environment hurting the company during the period, which is most likely signaling that both prices and profit margins are under heavy pressure.

Best Buy has a healthy balance sheet with more cash and equivalents than financial debt, so financial risk is significantly lower than in the case of Sears or J.C. Penney.

But electronics is a savagely competitive segment in which online retailers like Amazon have big competitive advantages versus brick-and-mortar stores, so Best Buy is certainly not out the woods at this stage.

Bottom line
What looks like a cheap stock can many times turn out to be an expensive mistake. Low valuations are of little use when a company's financial position is deteriorating and management can't seem to find a viable competitive strategy for the long term. Unless these companies can show more consistent signs of improvement, investors would be wise to stay away from these ailing retailers for the time being.

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Fool contributor Andrés Cardenal has no position in any stocks mentioned, and neither does The Motley Fool. 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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Keeping it simple.

Aug 7, 2015 at 11:26AM

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