Rumors of the death of retail may be greatly exaggerated, but there's no question that the rise of e-commerce is threatening brick-and-mortar stores and traditional shopping malls like nothing before.
Sears Holdings, the country's biggest retailer by sales not all that long ago, threw in the towel last year, filing for Chapter 11 bankruptcy. Other venerable retail names like Toys 'R' Us, Radio Shack, and most recently Barney's have all waved the white flag for bankruptcy protection, a clear sign that times are changing.
The rise of e-commerce has been a particular threat to traditional department stores. That retail model, which served customers so well in the 20th century, made everything from clothing to home goods, gifts to cosmetics and jewelry, available in one large building -- and seems utterly misguided in an age when so many things are readily available online. These days, the most successful brick-and-mortar stores tend to specialize in one product line, the way Lululemon Athletica does with athletic apparel.
Retailers like Bon-Ton Stores and Toys R Us have fallen into the retail dustbin, and J.C. Penney (NYSE:JCP) may be the next national department store chain to file bankruptcy and potentially call it quits.
That the retailer has even held on this long may be a credit to management's ability to stay viable just in case a magical turnaround opportunity revealed itself. However, the company's announcement Friday that it received a delisting warning from the New York Stock Exchange because its share price is consistently below $1 may signal that the end is nearer than some had hoped.
J.C. Penney's recent history
It didn't have to be like this for Penney. In 2011, when the company was treading water in the post-financial-crisis world, Penney turned to Ron Johnson, the so-called retail wizard who ran Apple's massively successful retail stores. Johnson arrived at Penney brash and with big ideas. He wanted to convert the selling floor to a town square model, with shops around a central area within the larger J.C. Penney store. He also demanded the company ditch its traditional discounting, though Penney's penny-pinching shoppers were loyal, in large part, because of the company's regular coupons and sales. When the discounting ended, customers seemed to simply stopped visiting stores, and the results were an utter disaster.
Comparable sales at the department store chain plunged 25% in 2012, Johnson's first and only full year as Penney's chief. By April of 2013, the board scooted him out the door, recognizing he was going to drive them out of business. Johnson made the worst mistake you can make in business: He didn't know his customer, and he didn't seem interested in getting to knowing them. Coming from Apple (as glossy a brand as there is in consumer goods), Johnson assumed the same tricks he learned there would work with Penney -- but it was just the opposite. The customer base at Penney, a 100-plus-year-old brand, was made up of middle-aged, middle-class women, generally in suburban and rural America. That demographic has a much different set of retail desires than the youthful, tech-savvy, city-dwelling hipsters that make up Apple's most devoted fan base -- the types known for lining up outside stores well in advance of the latest iPhone release.
Since 2013, several new CEOs have failed to turn around the business, and the company is now burdened with around $4 billion in debt and consistent losses when you use generally accepted accounting principles (GAAP). Following Johnson's ouster, the board brought back in Myron Ullman, Penney's previous CEO who had retired, on an interim basis. Ullman brought back the discounts and stemmed the bleeding wrought under Johnson. In 2015, the company gave the permanent job to Home Depot exec Marvin Ellison. Ellison's biggest initiative was bringing back appliances, competing to grab market share he believed was being "donated" by Sears.
However, appliances are a low-margin business, and the priority may have taken focus away from areas where it was needed -- like women's apparel (the company's biggest segment), which saw sales slide steadily during his tenure. As a result, Penney's recovery stalled, comparable sales growth evaporated, the stock price plunged, and Ellison immediately jumped ship when Lowe's came knocking to offer him the top spot at the home improvement retailer.
J.C. Penney today
Jill Soltau took over as the CEO in fall 2018, bringing executive experience from Shopko and JoAnn stores. Soltau's first major move (no surprise here) was jettisoning Ellison's appliance program in order to restore the company's focus to apparel. However, that hasn't been the panacea some had hoped for, and Penney's first-quarter earnings report in 2019 shows a company spiraling past irrelevancy and into insolvency. Comparable sales fell 5.5% in the period, and the company reported a $154 million loss, or $0.48 a share on a GAAP basis, worse than the $78 million it lost in the quarter the year before. If there was a silver lining in the report, it was that Penney's guidance called for positive free cash flow for the full year.
The company appears to be hanging by a thread at this point. With the stock trading below $1, the company is likely to be forced into a reverse stock split to remain listed on the NYSE. That would only add to the market's perception that it may not be much longer until the lights are out for good in its stores.
The biggest problem for Penney (outside of those of its own creation) is that it's managed to perform so poorly in what is otherwise a strong economy. Unemployment is near-record lows. Home prices are up. Wages are up. The stock market is at all-time highs. In other word, Americans have the cash, but they don't care to spend it at the aging department store chain.
There are just too many options for shoppers these days looking for apparel, home goods, and other items that were once Penney's bread-and-butter. Innovative e-commerce companies like Stitch Fix, The RealReal, and Revolve Group are taking share from traditional retailers like Penney. Amazon.com, meanwhile, keeps coming up with ways to make delivery even faster, a sign that e-commerce will only become a bigger threat to physical stores.
As the industry continues to moves forward, J.C. Penney will only get left further behind. The company has none of the assets or competitive advantages that might help spark a comeback. It has no particularly valuable brands. Its locations aren't anything remarkable, and it definitely doesn't have the valuable real estate holdings of, say, Macy's. An acquisition also seems unlikely, as there's not much of value for a buyer, even for a giant like Amazon.
In five years, Penney will almost certainly be a more decrepit version of its current self, if it's in business at all. Management's hands are tied from the debt load, and customers have spoken. They're moving on.