J.C. Penney (NYSE:JCP) shares were sinking again last week after the department store chain posted a comparable sales decline in the key holiday quarter, and said it would close 130 to 140 stores this year.
The store closure announcement was a reversal from CEO Marvin Ellison's assurance not so long ago that the company wasn't interested in closing stores. Last March, Ellison told Fortune his company would avoid closing stores because it needs all of its locations to support e-commerce operations and generate cash.
A lot has changed since then, however. J.C. Penney badly underperformed its own comparable sales target in the second half of 2016, as comparable sales fell instead of hitting the 3-4% mark the company had projected. Its peers continued to struggle -- Macy's (NYSE:M), Kohl's (NYSE:KSS), and Nordstrom (NYSE:JWN) all reported declining comps in the fourth quarter, and Macy's said last year it would close 100 stores.
As you can see from the chart below, the stock sunk to its lowest point since 2014, which was its lowest price of all time.
With the stock at close to its cheapest price ever, is it a buy today? Let's take a look at the bull and bear arguments.
J.C. Penney will survive
The decline in comparable sales and store closings are bad headlines, but the retailer's bottom line continues to improve. The company turned in its first annual profit since 2010, and though it only reached $0.08 in per-share profit for 2016, that was better than expectations. Mostly, the yearslong struggle to get out of the red shows how much damage the Ron Johnson era did to the company.
The good news for Penney is that despite the slowing comparable sales growth, it still met its goals further down the income statement. EBITDA hit $1 billion as its guidance had called for, and the retailer reported positive net income as it had projected.
Looking ahead, 2017 guidance calls for flat comparable sales, but for adjusted EPS to increase to $0.40-$0.65 as it sees modest improvements in gross margin and SG&A expenses.
That's within range of analyst expectations of $0.56, and it shows that the retailer's profitability continues to improve. It also gives the stock a very reasonable P/E of 10-16 based on this year's EPS. Assuming profits continue to increase in 2018, that forecast looks like a good reason to buy the stock today.
The writing is on the wall
The department store sector has gotten hammered over the past year. J.C. Penney and its three closest peers have all seen their share price wither, while the S&P 500 has surged in that time.
The industry is facing myriad headwinds, including competition from e-commerce channels, fast fashion retailers like H&M and Uniqlo, and declining mall traffic. While Penney has arguably had the best success in transitioning to a modern department store with its partnership with Sephora and InStyle hair salons and embrace of appliances and home goods, consumer shopping patterns are clearly shifting away from the mall anchors that dominated retail a generation ago. Even with the appliance rollout last year, Penney still saw comparable sales fall in the second half of the year.
For Penney and its ilk, that means that store closures will likely continue and same-stores could continue to fall. Under that cloud, it's hard to envision a long-term scenario that's favorable to the sector.
What's an investor to do?
J.C. Penney shares will likely bounce off their current lows as the stock has done every other time it's traded this low in the last three years. But the long-term picture looks less rosy. Ultimately, it will depend on the company's own ability to execute on its goals.
Its store-rationalization plan should improve its finances and bottom line, and if it can hit the higher end of its EPS guidance the stock will surely move higher. If, however, industry headwinds increase and comparable sales continue to decline, shares will be even lower a year from now. Management's inability to hit its own same-store sales guidance last year leaves concern that it could miss its guidance again.
There is certainly upside potential in Penney stock, but the risk makes it hard to stomach. Investors can find safer, more dependable bets elsewhere.