The Moment Of Truth For J.C. Penney

On Feb. 26, J.C. Penney is due to report fiscal fourth-quarter earnings. Heading into earnings, is the retailer a strong prospect, or should investors look to Macy's or Nordstrom instead?

Feb 25, 2014 at 4:30PM

G

Source: Wikimedia Commons

Feb. 26 will likely be the day that shareholders know whether J.C. Penney (NYSE:JCP) is likely to put together a turnaround or destined to go down in the annals of finance as a massive failure. After the market closes, the business is due to report earnings for the fourth quarter of its 2013 fiscal year.

Given the pressure that management is faced with and all the troubles the company has experienced throughout the past two years, fourth-quarter results will grant Mr. Market some much-needed insight. Heading into the retailer's release, should the Foolish investor jump into the fray, or is the situation far too risky for sensible minds?

No matter what the picture, J.C. Penney will likely remain a mess
For the quarter, analysts expect J.C. Penney to report revenue of $3.86 billion. If their forecast for the retailer turns out to be accurate, it will represent a 0.5% drop in sales compared to the $3.88 billion that was reported in the year-ago quarter. Although this sounds like a negative outlook, it's far better than the 28% decline in revenue the company experienced between the fourth quarter of 2011 and the fourth quarter of 2012.

In terms of profitability, Mr. Market is a little more optimistic. If analysts are correct in their assumptions, J.C. Penney will report a loss per share of $0.82. This is far better than the -$2.51 that the company reported the same quarter a year earlier, but there is one caveat that investors should consider: increased share count.

Over the past year, the company has increased its share count by 39% from 219.3 million to 304.62 million. Assuming that management hasn't done anything to significantly change its share count from the end of its 2013 third quarter, the company's net loss is projected to be $250 million, roughly half the $552 million loss reported a year earlier. This suggests that, while the business' picture is expected to improve this quarter, part of it is attributable to a rise in shares outstanding that essentially serve to distribute losses across a larger pool of units.

Does any of this really matter?
In the event that J.C. Penney surprises Mr. Market and reports a blowout quarter, shares will likely soar and hopes that the company can recover will permeate the air. However, anything shy of a blowout quarter could point toward a downfall for the company. If this second scenario proves true, it will only serve to bolster the argument that companies like Macy's (NYSE:M) and Nordstrom (NYSE:JWN) are attractive prospects.

Jcp Vs Others

Source: MSN Money

Whereas J.C. Penney saw its revenue decline 25% from 2011 through 2012, Macy's has seen its sales jump nearly 5% from $26.4 billion to $27.7 billion. The primary driver behind the company's growth has been a 3.7% jump in comparable-store sales.

Nordstrom did even better. Over the same time frame, the retailer saw revenue skyrocket by 12% from $10.9 billion to $12.1 billion. In its annual report, the company stated that its rise in revenue was due to a 3.9% jump in comparable- store sales combined with a 7% increase in the number of locations in operation, from 225 stores to 240.

Looking at profitability, J.C. Penney continued to be a disaster. Between 2011 and 2012, the company saw its net loss widen from $152 million to $985 million. This was due, in part, to its fall in sales but was also attributable to an increase in costs in relation to sales.

In juxtaposition, both Macy's and Nordstrom posted strong gains for the year. From 2011 through 2012, Nordstrom saw its net income rise nearly 8% from $683 million to $735 million. Although the jump in revenue helped the company's bottom line, it came at the cost of higher expenses. For the year, Nordstrom saw its cost of goods sold rise from 60.6% of sales to 61.2%.

Although Macy's was unable to keep up when it came to revenue, the company's rise in profitability more than offset this. Compared to a year earlier, the company reported a 6% jump in net income from $1.26 billion to $1.34 billion. Unfortunately, this was lower than Nordstrom's rise in profits, but unlike Nordstrom its net income rose at a faster pace than its revenue. This was due, in part, to the company's jump in sales but was also due to its selling, general, and administrative expenses falling from 31.4% of sales to 30.6%.

Foolish takeaway
Right now, it's impossible to say what kind of earnings J.C. Penney will report on Wednesday. However, given the fact that the business has been performing poorly these past couple years, it's difficult to believe that it can turn things around. For this reason alone, only shareholders who believe in the company's long-term potential should consider jumping into the picture now.

Meanwhile, investors who are more cautious and don't want to take a chance on an unstable business should consider looking into Macy's or Nordstrom, as both have a recent history of strong growth and profitability; both things that J.C. Penney sorely lacks.

Is J.C. Penney the creme de la creme?
Despite all of its troubles, there is the possibility that J.C. Penney could rebound and grant shareholders a tremendous return during 2014.  Is J.C. Penney truly the best stock to hold during 2014 or is it possible that there's a better opportunity for the Foolish investor?

There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Daniel Jones 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers