J.C. Penney (OTC:JCPN.Q) started the year with some optimism, and then saw those signs of hope disappear. The company entered 2018 in trouble but with a plan that looked like it should work.
Then-CEO Marvin Ellison wasn't following the path of rival Sears (NASDAQ:SHLDQ), which has mostly closed stores and done little else in its failed turnaround effort. Ellison instead made moves to right the ship, not just slow its sinking.
Over the past few years, he revamped J.C. Penney in an attempt to make its brick-and-mortar stores a destination for shoppers. He added store-within-a-store concepts including Sephora shops, revamped salons, and electronics departments. He also changed merchandise, added toy and baby merchandise after Toys/Babies R Us failed, and added home services in markets that Sears had abandoned.
On paper, these moves looked more like the ones that helped Best Buy and Macy's turn their fortunes around. In reality, they haven't worked, and Ellison jumped ship on May 22. That left the CEO's office empty during the crucial buildup to the holiday period -- which put the future of the company in jeopardy.
How bad is it?
Same-store sales, which tell you if consumers are responding to changes, improved by 0.3% and 0.1% in the first and second quarters. That's not an overwhelming vote of consumer confidence, but it's at least something to show that things might have been moving in the right direction.
Any hopes for that being true were dashed when J.C. Penney reported Q3 numbers. In that period, same-store sales dropped by 5.4%, putting the company into negative comps for the year and forcing it to revise its guidance down.
In its first-quarter earnings release, the company said it expected full-year comps to come in between a 0% and a 2% gain. Again, that wasn't great, but at least the needle wasn't pointing down. Now, however, in its Q3 earnings release, the company forecasts a low single-digit drop in comps for the full year.
That's a tough way to start a new job for Jill Soltau, who took over for Ellison. While she appears well qualified, Soltau's selection didn't wow investors. She formerly ran fabric retailer Jo-Ann Stores, but she's a relative unknown taking over at a time when many shareholders were hoping for a splashier hire.
What happens next?
J.C. Penney isn't Sears -- its end isn't inevitable. But it needs a major course correction. The company continues to lose money ($151 million in Q3 with only $168 million in cash or cash equivalents on hand). What might be more troubling is that the chain closed Q3 with $3.22 billion in inventory.
That's actually down 5.4% versus the year-ago quarter, but it's very possible that a sizable portion of that inventory isn't what consumers are looking for. Soltau arrived too late to make any major holiday course corrections.
She may have to start the year by liquidating inventory in order to raise cash to pay vendors for merchandise that might better meet consumer needs. Whether she (or anyone) can make both of those things happen is a major question mark.
J.C. Penney is not in immediate danger. It has managed its cash well and has minimized its losses. And its $4 billion in debt is less than half of the debt Sears is carrying. In addition, while Sears has roughly the same debt as it does assets, J.C. Penney closed Q3 with $8.4 billion in assets versus that $4 billion in debt.
That gives the company some room to maneuver, but not much. It's reasonable to think that Penney wants to close the books on its disastrous 2018 and enter 2019 ready to fight for its survival.