Please ensure Javascript is enabled for purposes of website accessibility

Will J.C. Penney Rebound From Its All-Time Lows?

By Leo Sun - May 23, 2018 at 6:17AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The retailer is treading water.

J.C. Penney (JCPN.Q) stock plummeted to fresh lows for the year after its first-quarter report indicated that the department store chain was still struggling to stay relevant. Its revenue dropped 4% annually to $2.67 billion, beating estimates by $40 million, but it posted an adjusted net loss of $69 million, or $0.22 per share, which missed expectations by two cents.

Less than a week later, CEO Marvin Ellison, who had been considered the company's turnaround leader, tendered his resignation and the stock dropped more, notching a loss of roughly 7% on May 22. Is there any hope left for J.C. Penney -- which has lost nearly 25% of its market value so far in 2018? Let's dig deeper into its first-quarter numbers to find out.

A JCPenney storefront.

Image source: J.C. Penney.

What's happening with J.C. Penney?

As a low-end mall anchor, J.C. Penney was hurt by declining mall traffic and competition from e-tailers like Amazon, superstores like Walmart, and fast-fashion retailers like Inditex's Zara. It tried to counter those threats with e-commerce investments; partnerships with home goods, cosmetics, and specialty apparel retailers; and the expansion of "store-in-stores" for some of those partners.

Specifically, J.C. Penney believes that new store-in-stores for brands including Nike, Adidas, Puma, and Sephora can win back shoppers. Yet many of these brands also run their own brick-and-mortar stores and e-commerce channels -- which directly compete against J.C. Penney's mini-stores.

J.C. Penney's comparable-store sales rose just 0.2% during the first quarter, completely missing the consensus forecast for 2.1% growth. Ellison attributed that soft growth to "unseasonably cool temperatures" and noted that its comps would have risen 1.5% if the weather impact were excluded.

Ellison also reiterated his prior guidance for flat to 2% comps growth for the full year. He claimed that J.C. Penney's turnaround strategies were "beginning to take hold" with apparel performing well during "seasonable" weather periods, and its beauty and home fresh initiatives performing "well above" its total comps growth. However, Ellison's resignation casts a cloud over those turnaround claims. Ellison, who joined J.C. Penney in late 2014, is going to become CEO of Lowe's. While J.C. Penney searches for a replacement, it has created an office of the CEO. Chief Financial Officer Jeff Davis, Chief Customer Officer Joe McFarland, Chief Information Officer and Chief Digital Officer Therace Risch, and Executive Vice President of Supply Chain Mike Robbins will "share equal responsibility for the company's day-to-day operations until a new CEO is appointed."

Margins are still a mess

J.C. Penney's stabilizing top-line looks encouraging, but Ellison noted that the company's gross margin remained under pressure due to supply chain and process issues at its e-commerce business, markdowns to clear out weaker apparel categories, and weakness in women's specialty apparel caused by adverse weather conditions.

JCP Gross Profit Margin (TTM) Chart

Source: YCharts

Ellison suggests that these are one-time issues, but the company's investors probably recall the company making similar comments throughout 2017. In the second quarter, it blamed its gross margin decline on the closure of stores and the liquidation of their inventories. In the third and fourth quarters, it claimed that higher sales of lower-margin appliances and e-commerce products weighed down its margins.

Those might all be "one-time" problems for J.C. Penney, but the long-term conclusion is that its turnaround issues -- exacerbated by its loss of pricing power -- are making it tough to expand its margins.

Nonetheless, the company believes that a blend of pricing analytics, markdown optimizations, tighter controls over its inventories, e-commerce improvements, and the improvement of higher-margin apparel categories will stabilize its gross margin.

Checkout counter at a JCPenney store.

Image source: J.C. Penney.

Yet J.C. Penney's full-year earnings guidance didn't signal much confidence in those plans. It previously forecast adjusted earnings per share (EPS) of $0.05 to $0.25 for 2018, compared to EPS of $0.22 in 2017, but it now expects a much lower range between a loss of $0.07 and a profit of $0.13.

The combination of "flat to positive" comps growth and deeply negative earnings growth tells us that J.C. Penney will try to use markdowns to drive comps growth, while its investments in e-commerce channels and more store-in-stores will apply additional pressure to its margins.

But could J.C. Penney eventually recover?

J.C. Penney isn't the next Sears Holdings yet, since it hasn't stumbled into a death spiral of burning the furniture to stay warm. But like Sears, J.C. Penney shoulders a lot of debt.

J.C. Penney finished last quarter with $4.1 billion in long-term debt. It's gradually paying off that debt, but that delicate balancing act could be derailed if its revenue growth dries up as interest rates rise.

J.C. Penney also still isn't winning back shoppers like its higher-end rival Macy's, which recently beat first-quarter expectations with a reduction of its brick-and-mortar footprint, monetization of its real estate, investments in its e-commerce ecosystem, and expansion of secondary brands like Bloomingdale's and Bluemercury.

Meanwhile, J.C. Penney is still treading water as it tries to gradually swim forward, but the abrupt loss of its CEO means that it could be running out of energy. I'm not saying that J.C. Penney's turnaround efforts won't eventually pay off, but I wouldn't touch its stock unless its comps growth and margins stabilize under a new CEO -- without all the "one-time" excuses.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

J. C. Penney Company, Inc. Stock Quote
J. C. Penney Company, Inc.
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
$122.63 (0.86%) $1.05
Macy's, Inc. Stock Quote
Macy's, Inc.
$17.97 (-1.91%) $0.35
Sears Holdings Corporation Stock Quote
Sears Holdings Corporation
SHLDQ, Inc. Stock Quote, Inc.
$109.56 (3.15%) $3.35
Lowe's Companies, Inc. Stock Quote
Lowe's Companies, Inc.
$177.36 (1.54%) $2.69
NIKE, Inc. Stock Quote
NIKE, Inc.
$101.18 (-1.00%) $-1.02
adidas AG Stock Quote
adidas AG
$88.28 (-0.36%) $0.32

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/03/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.