"All businesses need to be young forever. If your customer base ages with you, you're Woolworth's."-Amazon CEO Jeff Bezos
Struggling retailer J.C. Penney (JCPN.Q) announced plans to offer as many as 96.6 million shares to the public in an effort to raise capital -- as much as $1 billion -- in order to provide a cushion and stability as the company attempts to turn itself around. And while this will help the company in what may be a last-ditch effort to turn around, it's another terrible sign for investors. Let's take a closer look at why.
A ship lost at sea?
Coming off one failed attempt at an image change, the ouster of the CEO who was brought in to turn the company around, and the exit of activist investor Bill Ackman from the board of directors and a full divestiture of his hedge fund's stake in the company, 2013 has been an interesting year at Penney. Toss in a 16% decline in sales in the past year -- a number that ramps up to over 30% since the beginning of 2011 -- and it's easy to see why Penney, with its huge footprint of stores and the high cost of operating a large retail business, is quickly running low on capital. This is especially troubling with the holiday shopping season, a period where many retailers generate essentially all of their annual profits, just around the corner.
Penney is also shedding a member of its management team, Controller Mark Sweeney. And in shades of CEO Mike Ullman replacing the man who replaced him earlier this year, another former executive, Dennis Miller, is returning in an "interim" role to replace Sweeney. Simply put, we have two men who were at the center of the decline of Penney being brought back in this year to right the ship. This all adds up to major uncertainty as to the direction the company will go.
What staying young looks like
Macy's (M -0.07%) has kept its image fresh and young with a powerful marketing campaign called "One Star," featuring popular celebrities who customers relate with. The company's focus on appealing to a younger audience has led to stable growth since the beginning of 2011, growing revenue by 11% over that time, and earnings per share an astounding 75%. As a result, shares are up 70%, while Penney's shares have declined more than two-thirds. Penney's marketing has returned to its heavy reliance on coupons, which have very little attraction to the younger, more dynamic audience that Macy's is attracting, which is more interested in fashion trends than discount shopping.
Additionally, the explosive growth of web commerce, especially Amazon (AMZN 0.80%) has continued to pressure all traditional retailers. Amazon's sales over that same period-early 2011 until now -- have grown more than 80%. And while Amazon doesn't heavily compete in clothing the same way that it does in consumer electronics, books, and digital media, the trend to Internet shopping is quickly spreading to fashion. Per Internet Retailer, Gap (GAP -0.05%) grew its web sales by 20% in 2011, and 24% in 2012, even as total sales were essentially flat. As a result, earnings per share are up more than 40%, partly due to the increased profitability of web-fulfilled sales, and the stock price is up 83%.
Foolish final thoughts
Maybe Ron Johnson's attempt to shift Penney away from its current customer base was heavy-handed, as the serious revenue decline during his tenure seems to indicate, but there are plenty of reasons to wonder whether the management team in place will be able to both satisfy loyal customers while also appealing to a new crowd. Because frankly, Penney, to paraphrase Bezos from the open, is looking more and more like the next Woolworth's than Macy's. And that was true before shareholders lost more than 40% of their equity through this share offering. Don't throw good money after bad. It's time to move on.
