Is There Any Hope for J.C. Penney?

The retailer has been struggling, and the moves J.C. Penney (JCPN.Q) has made have not worked. That leaves the company with limited prospects for a turnaround. CEO Jill Soltau is trying to buy herself time by extending maturity dates on the company's $4 billion in loans. That might help, but debt costs money, and it's hard to see how borrowing money will keep the struggling retailer afloat. On top of that, J.C. Penney stock has fallen below $1, and the company has six months to get it above that number or risk being delisted.

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This video was recorded on Aug. 13, 2019.

Dylan Lewis: One of the other major issues when you start looking at a business that is circling the drain, maybe it's fair to say that here, is when you have a large looming debt load, you have these interest payments that come due. For the last couple of quarters, it's been about $70 million for JCPenney. They have some people that they've brought on to help them manage their debt better, but that becomes a pretty big burden to carry, especially for a business that's lost I think $300 million over the last 12 months.

Dan Kline: And when you're in a situation where the people who've loaned you the money start to become worried about your ability to pay the money back, they're not generally willing to be like, "Let's cut the interest rate! Let's give you six months where you don't have to pay interest!" This isn't a mortgage. This isn't a situation where, yeah, you lost your job but then got a new job that pays a little more, so they'll let you catch up. There's nothing about the JCPenney business, there is no move Jill Soltau can make, to turn this around. And I feel bad saying that. I like this company. I like this brand. I want it to survive. It's bad for malls for JCPenney to go away. But think about how you shop -- it's primarily digital first, even if you're going to go to a store. Their app is behind the times. Their efficiency is behind the times. A lot of what they sell is sold by Amazon or Target. Even the things they don't, like a suit, you're going to go to a store to buy a suit. JCPenney's, maybe some of them do, but all the ones I've been in don't have a tailor. The Macy's that's down the mall corridor, which might cost a little more but sell you a suit that isn't labeled to Michael Strahan -- and no offense against Michael Strahan, but I prefer a suit designer than a football player have his name on my suit.

Lewis: You don't want the linebacker cut, Dan? [laughs]

Kline: [laughs] I could probably wear the linebacker cut! It just comes down to, we've seen this before. If you don't have assets -- Sears sold off a ton of assets trying things that didn't work. JCPenney sadly doesn't have anything to sell off, or not much that I can see. So, they're in a situation where, unless someone comes in and takes them private and says, "I see value in the store base, I see value in the brand name. I'm going to invest," let me just guess, "$4 billion in it," that all they can do is extend the debt cycle. And as a creditor, I don't know why ... maybe you get a little more blood out of the stone by doing that? Maybe there's some assets you can claim at the end of this? I feel like the game is already over, and they're still trying to convince us it isn't.

Lewis: Yeah. If you look at the share price over the last, I don't know, 12 months or so, it is not the chart you want to see. It is down and to the right. Usually, we like to see up and to the right. And recently, it has gotten to the point where it is below $1. That's where things start to get problematic for companies that are listed on the New York Stock Exchange.

Kline: They got a delisting warning. Essentially, when that happens, you have six months to get your share price over $1 for a period of time. I don't remember the actual period of time. To do that, there's a few levers you can pull. You can have a good quarter, [laughs] and people might go, "Ooh, this stock is more valuable than we thought it was!"

Lewis: We'll call that the organic route.

Kline: That doesn't take that much. If you remember with Sears, maybe 11 out of 12 quarters for three years, to diminishing returns, would deliver an upbeat press conference. "It's working! We're turning it around! Even though all these numbers are terrible, our last three weeks of the quarter beat last year!" Like, they'd find whatever way it was to spin. Like, Tuesday's No. 1 hit drama. It's like wait, that's the only drama on Tuesdays, and it's not getting any viewers? That's kind of how... But, the stock, in the short term -- sometimes for days, sometimes just for hours, would spike because people only read the beginning of the earnings release. And Eddie Lampert, the former CEO of Sears, now owner of Sears, was brilliant at spinning bad numbers good while meeting the legal requirements of reporting bad numbers.

JCPenney has not been as aggressive in doing that. But they could very well come out this quarter and say, "Hey, we're really seeing big numbers in women's apparel, and that's what we're moving into more, so we expect to be profitable six months from now." And the stock might bump above $1, which would be a really big bump --

Lewis: It's $0.60 a share right now.

Kline: -- but it's not going to sustain it.

Lewis: Yeah. So, you need to go a second route when we're not getting the results.

Kline: Which is a reverse split. A reverse split essentially says, I have one share of stock worth $0.60; now I own one-tenth of a share of stock -- they can pick whatever number they want, in terms of 1-for-10, one-for-50, 1-for-12.5 if you really wanted to. But it takes the amount of shares down, so it makes what's left more valuable; or, at least, a higher dollar amount. They're actually the same. But what happens with that is, there's a psychological effect. It's very discouraging. It's like, you come home, and -- you're not married, I am -- and you say to your wife, "Good news! We have to buy a much smaller house. But...yeah, there's no positive."

Lewis: Yeah, there's no positive. Anyone that's familiar with stock splits, usually the opposite is happening.

Kline: And that's the same thing. There's no actual new value created, but it's exciting, and it tends to send a stock up. A reverse split tends to be a move that investors perceive as a death throe. And I don't know what the percentages are, but it often is a death throe.

Lewis: Yeah, it's one of those signs I see and say, "This is probably a business that's struggling," particularly if they're doing it to maintain their listing status. It seems like that might be a route that JCPenney has to go down at some point in the next six months.

Kline: Yeah. The interesting piece is, you can wait until very late in the game. But we now have two years of JCPenney planning for Black Friday so they can get a piece of the pie. And the last two years, it seemed really hopeful. There'd be news stories like, "There's lines at JCPenney!" And it's like, there's lines everywhere! Did people buy stuff? Or did they get lured in by, JCPenney had a good deal on something, and yes, they made a lot of transactions, but the people making those transactions and buying, whatever, the $8 polo was only $6, and they bought two of them -- it's not needle moving, and the overall sales numbers will be disappointing. And I can't imagine there's anything JCPenney could do this Black Friday to change that.