If you've read any of the articles that I've written about struggling (yes, they're still struggling) retailer J.C. Penney (JCPN.Q) over the past 18 months, you know where I stand. I'm not impressed with what former-come-again CEO Mike Ullman and his team have done and are doing. The things that they've chosen to do -- I'm lookin' at you, 39% shareholder dilution -- have destroyed shareholder value that will probably never be recovered for longtime investors.
With the Q1 earnings now out, there's a lot of positive momentum behind the stock, and frankly, it's in the face of some relatively damning evidence that Penney isn't anywhere close to a full recovery yet. Amazon.com (AMZN 0.10%) and a bevy of other Web retailers are showing how much the dynamic has shifted in the way consumers want to shop. So before you decide to invest in J.C. Penney, I think it's a good idea to look past the last six months and even past the disastrous year before.
Frankly, Amazon is the better investment today and far into the future. Let's talk about why.
When good numbers are just less awful
J.C. Penney reported same-store -- or comparable -- sales growth of 6.2% in the quarter after reporting 2% comparable-sales growth in Q4, including a 3.1% sales increase during the all-important holiday shopping season. So, while I have to give credit where credit is due -- sales growth two quarters in a row is a positive achievement for the company -- it's way too early to call this a turnaround. After all, Penney is still selling less merchandise than it was in 2012, and by a pretty wide margin.
In Q1 of 2012, J.C. Penney's total sales were $3.152 billion, versus $2.8 billion in the just-announced first quarter. That's still a double-digit decline in sales, and far from a clear indication that the company is back on the right long-term track to stay. Let's take a look at the long-term trends for quarterly sales for Penney and Amazon:
JCP Net Income (TTM) data. Source: YCharts.
Going back for a decade, it's pretty clear where consumer demand is headed.
Unfair comparison?
Maybe, but probably not. I think the reality that Penney investors -- and management -- must face is that consumers are rapidly shifting to online purchasing for essentially everything, from consumer goods to housewares and even clothing. The biggest challenge that Penney faces right now is that it's still not really clear what it's going to be when it grows up.
While Amazon has become identified as the "everything" store, and often the first and last place many shoppers go to for almost everything, J.C. Penney is stuck between its legacy of coupons and "always on sale" -- a legacy that was in decline and led to Ullman's ouster in 2011 -- and the failed attempt by Ron Johnson to implement a new strategy to attract new, and more affluent, customers to the stores. The Penney of today is still in limbo, with no real clear path forward, outside of the return to heavy discounting and coupons under Ullman since his return.
Still losing money
Amazon detractors often point at the company's very thin margins, and narrow profits, as an indication that the company's model is not sustainable. But the difference between Amazon's and J.C. Penney's financials is very clear: One is investing heavily in expansion and one is bleeding cash and still in decline:
JCP Operating Income (TTM) data. Source: YCharts.
Penney's operating income was still a $247 million loss, even though it was improved from a year ago. That's a billion-dollar operating shortfall for a full year if it's not quickly improved. That's just not a recovery.
Don't jump the gun
As harsh as my criticism of Ullman and his team has been, I laud them for still doing what they can to save the business despite the beating they've taken. However, it's still pretty clear that shareholders have been hammered, and many will never recover what was lost, and I'm just not convinced that Ullman and team have made the best decisions with regard to shareholders, the owners of the business.
With that said, Penney could turn into a good investment, but I think we need to see the company hit its guidance for the rest of the year first: reach breakeven free cash flow, continue to recover comparable-store sales, and improve liquidity significantly.
Frankly, until J.C. Penney demonstrates that it can return to sustained profitability, it remains a speculative, risky investment. Amazon, on the other hand, will continue to grow for many years to come. With the stock down almost 25% this year, Amazon has far more predictable upside.
