Is J.C. Penney the Next Blockbuster or the Next Blockbuster Video?


Source:  Wikimedia Commons

If you want evidence of how misleading small same-store sales increases can be touted for an otherwise money-losing and failing business, take a walk down memory lane and head on over to Blockbuster Video. In early 2009 Blockbuster Video touted a quarterly and even full year same-store sales increase . Hurray! Alas, just one year later it filed bankruptcy. While J.C. Penney (NYSE: JCP  ) probably has far better hopes than Blockbuster Video had, the lesson is still the same -- don't be too quick to jump to the conclusion that a turnaround is in place when positive same-store sales are touted. . 

The Blockbuster Video details
On March 19, 2009, Blockbuster reported its fiscal fourth-quarter and full-year results. Same-store sales jumped 6.4% for the year ending Jan. 4, 2009, a hair higher than the much-celebrated 6.2% improvement in J.C. Penney's most recent quarter. Both rentals and product sales saw healthy-looking gains.

For Blockbuster, it was the fourth quarter in a row of positive same-store sales gains. Blockbuster even managed to report a decent "adjusted" net income. Michael Pachter, an analyst with Wedbush Morgan at the time, stated, "The sell-off in the stock due to recent rumors on a Blockbuster bankruptcy was overdone as we continue to believe that the company is not currently at risk of entering bankruptcy."

Long story short, Blockbuster filed for bankruptcy a year later. The same-store sales "gains" were just small bounces in comparison with already-decimated revenue. Product sales were up because the company slashed prices on previously written-down inventory and sold it on the cheap.

It reminds me at least a little of J.C. Penney.


Source:  Wikimedia Commons

The not-so-blockbuster results
J.C. Penney reported fiscal first-quarter results on May 15. Revenue rose 6.1% to $2.8 billion. Same-store sales jumped 6.4%. That's about where most of the "good news" ends, as there were so many problems with these turnaround figures I don't know where to begin.

First, the comparable quarter for J.C. Penney included a 16.4% drop in revenue and a 16.6% plunge in same-store sales. The improvements are better than further declines, but they're slight improvements from very depressed levels. For example, in the first quarter of 2012, J.C. Penney's revenue was $3.152 billion so its most recent quarterly revenue remained significantly below even that. The 2012 quarter wasn't even anything to write home about in the first place since J.C. Penney lost $163 million in that quarter alone.

Second, speaking of losses, the most recent operating loss shown by this report was a staggering $247 million. Sure, it was a 49.2% improvement, but that's still quite a lot of bloodshed and leaves the company with a long way to go.

Next, J.C. Penney listed "Women`s and Men`s apparel" first on its list of top performing divisions. If you take J.C. Penney at its word, that may have been a result of the unusually cold temperatures. Recall back on the conference call in November, Mike Ullman, CEO of J.C. Penney, stated, "Women's apparel, men's apparel, and fine jewelry were some of the top performers in the quarter, especially in seasonal categories as the weather turned colder." We didn't exactly have a heat wave either in the first quarter of this year. J.C. Penney probably sold a lot more boots, jackets, gloves, sweaters, and scarves then too than it would have normally.

Finally, last but not least, two phrases popped up in the release that brought back more Blockbuster memories: The phrases "negatively affected by an increase in clearance sales" and "negative clearance margins." This means sales benefited from selling merchandise for less than the company paid for it. That's not exactly a bragging point. I can sell $100 bills for $90 all day long too.

Foolish final thoughts
I'm not saying that a turnaround isn't possible. The intention of using Blockbuster as a counter-example is just to illustrate that "less bad" numbers aren't enough evidence of a solid recovery in a failing business, especially with so many surrounding circumstances such as sales of inventory at a loss that give the illusion of sales improving more than they actually are. The next year will probably ultimately tell the tale, and in this Fool's opinion the jury is still out and it could go either way. If J.C. Penney really does successfully reinvent itself back into a blockbuster, I'd rather be late to that party then take the risk sooner as it could become the next Blockbuster Video.

J.C. Penney sells things for your living but there is more money out there
You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple. 

 


Read/Post Comments (6) | Recommend This Article (3)

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 June 07, 2014, at 10:07 PM, CFHW wrote:

    I think you are wrong in comparing Penny's to Blockbuster. No one rents DVDs any more they download their movies. So Blockbusters mode of business went away. People still buy household goods and still wear clothes so Penny's business is still around. Penny's foolishly tried to go with upscale brands which doesn't appeal to their core customer. I used to go there a lot. In the spring I would buy 4 white tops because white always turns grey after 10 washings. I expect these tops to cost less than $20. I do not want one $80. white top that also turns grey after 10 washings. Same for fall I always buy 4 black tops which turn drab gray after 10 washings, I do not want one black top for $80. that also turns gray after 10 washings. Penny's didn't understand their customers because they hired an idiot to run the company and that can be turned around. I also don't buy ridiculous looking clothes because they are in fashion. But I do buy a lot of clothes and I buy them for 6 people. Why don't they hire a Mother to run their company?

  • Report this Comment On June 08, 2014, at 12:01 AM, misanthrope wrote:

    I don't understand the merit in this article or why it was written in the first place? Its essentially an essay length rant on why you think being hopeful for this store is pointless. Why does it matter? They have better numbers, its already well established the possibility of JC Penney closing its doors someday is plausible or even likely, at this point we just have to wait and see. Why dance around the grave?

    I've noticed Yahoo is really pushing an anti-JCP agenda making sure any negative article about the company is front and center on their homepage and I have little doubt in my mind that articles are chosen strategically as to tell consumers what opinions to have.

  • Report this Comment On June 08, 2014, at 10:27 AM, cytrax wrote:

    Week after week, Motley Fool is regurgitating the same old negative articles. You said in your closing statement JCP's turnaround is not impossible, yet you sit there behind your keyboard comparing JCP to Blockbusters. Despite the fact that Blockbuster had a dying business model in DVD rentals that were on their way out, you still chose to use them as an example of what JCP is. This is like comparing apples are bananas. And you call yourself an expert?

  • Report this Comment On June 08, 2014, at 2:47 PM, Roddy6667 wrote:

    I retired from JCP supply chain a year ago. There are no substantial changes to the entire supply chain. It is run by hammerheads that worked their way up from the loading dock. They are clueless about what it takes to be an efficient, responsive supply chain in today's retail world. There may be a turnaround in the stores, but the expensive mechanism that gets the goods from China/Vietnam/Bangladesh to the US customer is virtually unchanged. They need to fire a bunch of people in Dallas (Plano) and bring in fresh blood that knows how to buy what the customer wants and get it to them cheaply before it goes out of style. It's not happening.

  • Report this Comment On June 08, 2014, at 3:02 PM, nickeyfriedman wrote:

    The lessons here cross any consumer-retail business model.

    While J.C. Penney (NYSE: JCP ) probably has far better hopes than Blockbuster Video had, the lesson is still the same -- don't be too quick to jump to the conclusion that a turnaround is in place when positive same-store sales are touted.

    The intention of using Blockbuster as a counter-example is just to illustrate that "less bad" numbers aren't enough evidence of a solid recovery in a failing business, especially with so many surrounding circumstances such as sales of inventory at a loss that give the illusion of sales improving more than they actually are.

  • Report this Comment On June 09, 2014, at 9:31 AM, jallardcol wrote:

    I think that while the warnings about investing in JCP are appropriate, this comparison is totally misguided. Comparing a company with two offerings/products (trying to establish itself online)in a declining industry to a company that has a very wide range of products in a market that is not anywhere near death is ridiculous.

    You should be more serious in your postings. It hurts your reputation to sink to this level. The author is obviously holding short positions on JCP or has some relatives/friends who do.

    Sad day for Motley.

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