J.C. Penney - A Team With No Offense

The thing that troubles me about J.C. Penney (JCPN.Q) is that it's always on the defense. If I'm going to invest in a company, it's not only going to be because the business knows how to fend off its rivals, but because it's ahead of the pack in some way. A trend-setter J.C. Penney is not, and in fact if the business were a sports team my guess is that the fielders would be looking awfully tired by now. 

It's been said that the best offense is a good defense, but in the case of J.C. Penney that strategy just isn't working. The company's latest defensive move was to adopt a poison pill to temporarily stave off a takeover from any new investors looking to acquire more than a 10% stake. This is unfolding just as activist investor Bill Ackman, who in recent days resigned from the retailer's board and who has an 18% position in the company, mulls abandoning his holding.

Shares of the embroiled retailer are down more than 30% year-to-date. In the second quarter, which represented chief executive Mike Ullman's first full quarter at the helm, comparable-store sales fell nearly 12%, and the company's defense is that the sequential declines are becoming less severe. But the company isn't profitable, and sales in the recent quarter fell 13% to about $2.7 billion, pushing gross margins down to 29.6% from 33.2% in the year-ago period. Online sales were down, and once again the defense is that the decline is not as bad as it used to be. When are we going to see real growth?

J.C. Penney is a company that -- like a team fighting for a wildcard spot -- can't afford to make any mistakes. With the stigma of the coupon events behind it, J.C. Penney had every opportunity to regain its position of popularity among its customers. But it made a huge misstep in its marketing program when it launched an ad campaign that seemingly promoted bullying among children,   and from the looks of the sales figures J.C. Penney's culture isn't resonating with consumers.

J.C. Penney claims to have a "rigorous" focus on marketing; it has earmarked $300 million for capex for the remainder of the year and pegs capex at $300 million again for fiscal 2014. Let's hope it's enough to put this company back in the game--but I'm not willing to consider the stock a buying opportunity at this point.

A business on offense 

Take electric vehicle maker Tesla Motors (TSLA 1.85%). Different industry, but in terms of innovation Tesla co-founder Elon Musk is not only on the offense--he's writing the playbook.

This doesn't mean the company doesn't need a defense. Analysts at Stifel Nicolaus expressed concerns because the company's nearest competition is closing in on Tesla, and is now only a year to a year and a half away. At that point, the company could face heightened pricing pressure for its offerings.

But Tesla isn't frozen by the rising competition and doesn't appear to be cracking under pressure. Instead, it ramped up its production levels on its Model S premium sedan to 500 per week in the second quarter, a 25% increase over first-quarter levels,  with expectations to increase vehicle production in the coming years. 

Source: CNBC 

While J.C. Penney is overburdened with real estate and underwhelmed by sales, Tesla is making an expansion push. The electric vehicle maker opened more than a half a dozen retail locations in the second quarter including its maiden location in China. Tesla recently began shipping its Model S sedans to Europe, and projects that sales of the vehicle are on track to surpass 40,000 per year by late 2014.

Tesla's balance sheet is strong; the company boasts nearly $750 million in cash as of the second quarter, which becomes more impressive when you realize that the amount reflects a $516 million sequential increase. The company has $578 million in long-term debt . With the exception of the pricey entry point -- shares have more than tripled year-to-date -- there's not much not to like about the company. I would use a pullback in the shares as an opportunity to make an offensive move and buy, and fully expect to be rewarded in the coming years. 

Between innings

In keeping with the theme on leadership, let's take a look at a company that seems to be caught between innings -- Hewlett-Packard (HPQ -0.11%). Meg Whitman was dealt a tough hand when she took the top spot at the company in January 2011. 

The company hasn't abandoned its dividend, despite an identity crisis (PCs, enterprise/servers/storage, printing, etc), and shareholders earn a yield of 2.2%. Shareholders shouldn't be too worried about the dividend being in any type of jeopardy -- the company generated $7.2 billion in free cash flow so far in its fiscal year, and is approaching a zero net-debt position. 

On a defensive note, the company has reneged on earlier projections to achieve revenue growth in fiscal 2014. That's no longer possible, says Whitman in a recent CNBC    interview, as the company faces headwinds such as pricing pressure in the server business and instability in the PC market. 

But HP is also playing offense. The company returned $283 million to shareholders in the most recent quarter by way of dividends and share buybacks. And with net debt nearly wiped out, it is looking to grow by strategic acquisition. The company would consider deal sizes between the $100 million to $1.5 billion range. The takeaway here is that despite the fact that HP is in the midst of a five-year turnaround, it hasn't abandoned growth or its shareholders.  

Conclusion 

In business, just like in sports, there needs to be a strong offense and defense in place in order to succeed. Even a growing company like Tesla must be aware of its competition, which it is, and yet keep its sights set on new opportunities. J.C. Penney doesn't have its offensive team on the field at this point, and its defense isn't doing all that great either. As for HP, it's a promising turnaround story.