2017 was an ugly year for the department store industry across the board, but J.C. Penney Company, Inc. (JCPN.Q) had it worse than most. Shares of the venerable chain are down 63% with just over a week left in the calendar.
Expectations were high heading into the year, as the company seemed to be making progress in recovering sales and profits following the disastrous tenure of former CEO Ron Johnson in 2012. However, a series of disappointing earnings reports and growing concerns about the so-called "retail apocalypse" crushed the stock. Here's the year that was for J.C. Penney.
Image source: J.C. Penney.
Starting off on the wrong foot
Like much of the department store industry, J.C. Penney stock started sliding in the first week of the year after the company and its peers turned in underwhelming holiday sales numbers. Penney said that comparable-store sales slipped 0.8% during November and December, missing the company's guidance. CEO Marvin Ellison called the beginning of the period "challenging." As a result, the stock fell nearly 15% over a three-day period as its peers also sold off.
In February, in a sign of retrenchment, the company said it would close 130-140 stores in order to optimize its retail operations and bring its brick-and-mortar presence in line with its omnichannel strategy. While the store-closing announcement was not a big surprise -- it followed similar moves by Macy's (M -1.63%) and Sears Holdings (SHLDQ), as well as other retailers -- it did mark an about-face from a statement Ellison made just a year before when he said the company wouldn't close any stores, because he saw them as crucial for driving e-commerce.
That shift in strategy seemed to indicate that those stores were underperforming the company's own targets or that the company itself was, making an aggressive change like closing more than 100 stores and laying off thousands of employees a necessary move in order to save the business.
Performance continues to lag
Investors hoping J.C. Penney would bounce back in its first quarter were disappointed again as sales continued to slump. Comparable-store sales fell 3.5%, their worst result in several quarters, and significantly lagged the company's full-year guidance of flat comps. The company noted particular weakness in women's apparel.
J.C. Penney maintained its full-year guidance, which included adjusted earnings per share guidance of $0.40-$0.65, but as my Foolish colleague Tim Green pointed out, that guidance now included a gain of $111 million on a sale of its Buena Park distribution facility. One-time windfalls such as real estate gains aren't normally included in adjusted earnings or adjusted earnings guidance, and without that, J.C. Penney's adjusted earnings guidance would have been around breakeven. Investors seemed to see through the ruse: The stock fell 14% the day guidance came out.
By the time the company updated investors again in August, it only had more bad news in its second-quarter earnings report. Comparable-store sales, which did not include the stores slated for closure, fell 1.3%, and liquidation sales weighed on margins, causing the company to report an adjusted net loss of $0.09 in the quarter and to slash its gross margin guidance for the year. Shares plunged 17% on the report.
Limping into 2018
Over the past month, other department-store chains have recovered some of their losses as a better-than-expected round of retail earnings results in November, bullish reports, and Black Friday sales have combined to push retail stocks higher. Macy's is up 45% since reporting third-quarter earnings, Kohl's stock is now up for the year, and Nordstrom is essentially flat for the year. J.C. Penney, however, has not benefited.
The stock plunged again when J.C. Penney cut its full-year guidance in a preliminary earnings report in October, saying it now expected adjusted earnings per share of just $0.02-$0.08, and for comparable-store sales to be down slightly. The stock regained some of those losses when its third-quarter report came in better than expected, but shares have mostly traded flat since then even as peers have gained.
What's been so disappointing about 2017 for J.C. Penney is that the company made a number of moves that should have improved its performance. In January, it added Nike shops to about 500 stores. It expanded its partnership with Sephora and InStyle, which have been sources of strength for the company in recent years. And it added appliances to more stores, and introduced toy shops, which should give it an assist during the holidays.
However, in spite of all those moves, comparable-store sales and GAAP EPS are still expected to decline this year, a reflection that even if those actions helped, they weren't enough to counteract the ongoing weakness in the business. That, above all, may be the most disappointing thing for J.C. Penney investors this year.
A strong holiday season would certainly give the stock a boost, and continued fallout with its brick-and-mortar competitors, especially Sears with which it co-anchors hundreds of malls, should help drive traffic. Still, J.C. Penney management has offered little reason to be optimistic going into 2018.
The company isn't about to go out of business, but it's still flailing amid the broader retail upheaval. This turnaround play is in need of a jump start.
