Department stores are a dying breed these days. Already under siege by e-commerce giant Amazon.com (NASDAQ:AMZN), hyper-focused online shopping services like clothing specialist Stitch Fix (NASDAQ:SFIX) and rising home goods portal Wayfair (NYSE:W) are only adding fuel to the sector's funeral pyre.
Some of the mall store giants of yesteryear may still get back on their feet again, but a couple of household names don't seem to have any hope at all.
Some investors might put J.C. Penney (NYSE:JCP) in the first of these categories.
That would be a huge mistake.
What's wrong with J.C. Penney?
J.C. Penney has been struggling for years, harking back to a disastrous holiday shopping season in 2012. The retailer's top-line sales stalled hard at that point, dipping 5% lower over the next five years. Annual earnings have been consistently negative since then, and it's a good year when J.C. Penney manages to shore up its free cash flows near the breakeven point.
In an industry where paper-thin profit margins are the norm, J.C. Penney stands out as an underperformer. It isn't impossible to find department store chains with weaker profit margins and returns on equity than J.C. Penney, but the names you find there are already circling the proverbial drain.
Share prices have fallen 46% lower in 2018 alone, 79% lower over the last three years, and a heart-stopping 95% lower in a decade.
The only way is up, right?
I love a turnaround story as much as the next value investor, but J.C. Penney is not showing any signs of improvement.
- The company has fallen short of analysts' earnings expectations in two of the last four quarterly reports. In particular, the most recent financial update was a huge miss. The Street was expecting a net loss of just $0.06 per share, but J.C. Penney reported an adjusted $0.38 loss per share.
- CEO Marvin Ellison jumped ship in May, picking up the same title at home improvement retailer Lowe's (NYSE:LOW) instead. J.C. Penney still hasn't found a permanent replacement, and fellow Fool Dan Kline isn't convinced that anybody with the right skills and reputation would even want to steer this sinking ship.
- The balance sheet is a wreck. J.C. Penney has $182 million of cash equivalents on hand, balanced against $4.2 billion of short-term debt balances and another $4.0 billion in long-term loans and bonds. That crushing debt load is adding $363 million of annual interest payments to an already strained income statement.
...but there must be a turnaround plan
I don't believe in the improvement ideas the company is considering. Management is starting to sound downright desperate, too.
In the latest earnings call, CFO Jeff Davis promised "a sharper focus on both quality and quantity," while clearing out bloated inventories through generous discount sales. In short, he wants to run a lean merchandise pipeline just like Wayfair, Amazon, and Stitch Fix do, but in a physical store format. That's not an easy trick to pull off since the e-commerce rivals carry much lower overhead costs around their leaner, meaner business models.
And it gets even harder when you add in the fact that Davis doesn't even seem to believe in his company's overall strategy anymore.
"Over the last few years, we've drifted from our core customer," he said, continuing:
It is critical for us to better manage our inventory levels and focus on providing our core customers the assortment and shopping experience that she expects from JCPenney. Now more than ever, we must be more intensely focused on executing upon the fundamentals of our core business.
...while also delivering laser-precision focus on both quality and quantity, and don't forget about managing those unwieldy inventory flows. That's not a realistic operating plan, friends.
I'm sorry, but I don't see how J.C. Penney can pull out of this nosedive before it's too late. You won't find me tapping the "buy" button on this stock anytime soon -- or ever.