J.C. Penney is one of the most hotly debated stocks on Wall Street. The bullish argument is that customers are slowly returning to J.C. Penney stores and CEO Mike Ullman has the company headed in the right direction. The bearish argument is that too much damage has been done, the brand has been tarnished, and a sustainable recovery is a near impossibility. After looking at some key numbers and trends, the answer seems to be somewhere in the middle.
In the second quarter, net sales came in at $2.66 billion, moderately lower than the $3.02 billion delivered in the year-ago quarter. Comps declined 11.9% year over year, mostly due to failed merchandising and promotions, markdowns, renovations, and an ineffective remerchandising of the Home department. The bears would be smiling right about now, but a positive trend also exists.
For instance, comps increased 470 basis points sequentially, and overall sales improved in each month of the second quarter. J.C. Penney expects this trend to continue in the second half. Therefore, it's possible that CEO Mike Ullman's fixes are in motion.
Retailers and consumers go hand in hand. If the consumer is weak, then there's little hope for most retailers. J.C. Penney could limit the damage with promotions, which may attract value-conscious consumers, but industry trends are still more powerful than any promotion. Currently, there are several issues to worry about.
The housing market plays a big role in consumer confidence. When housing prices appreciate, homeowners feel wealthier and they spend more. Housing prices only appreciate when demand is high. Over the past few years, extremely low supply and historically low mortgage rates have driven demand higher. Currently, however, the 30-year fixed mortgage rate stands at 4.69%, considerably higher than the 3.53% rate in January. As mortgage rates continue to creep higher, fewer people purchase homes, and home prices retreat. This, in turn, leads to a weaker consumer, a headwind for J.C. Penney and retail in general.
Then there's underemployment. The economy added 169,000 jobs in August, and the unemployment rate fell to 7.3%. However, what most people don't pay attention to is that the July number for jobs added was revised down to 104,000 versus the original report of 162,000. And, as you might already know, labor force participation continues to decline. Once again, this will negatively impact the consumer, which will then limit potential for J.C. Penney. In addition to these headwinds, consumers must contend with high gas prices and a 2% increase in the payroll tax.
J.C. Penney vs. Peers
Given these headwinds, let's see how J.C. Penney stacks up against its peers.
J.C. Penney is like Kohl's (NYSE: KSS) in that it offers a broad array of brands and products at discounted prices. However, J.C. Penney is more often brought up in conversation with Macy's (NYSE: M), which had been a Wall Street darling up until about one month ago.
Macy's is known as a top-notch retailer because of its strong fundamentals and its ability to appeal to almost every consumer. But it recently missed earnings expectations for the first time in six years. This, combined with Wal-Mart's warning of a weakening consumer is concerning for retail as a whole. Macy's stock has paid the price, depreciating 8% over the past month, at a time when J.C. Penney's stock appreciated nearly 10% on turnaround hopes. This is the complete opposite of what took place over the past five years.
If you're beginning to favor J.C. Penney over Macy's, don't get too excited just yet. While J.C. Penney has more upside potential on a turnaround, it's not nearly as stable as its peers.
Earnings trends haven't impressed either:
Also, J.C. Penney has a debt-to-equity ratio of 2.51 versus much healthier debt-to-equity ratios of 0.76 and 1.18 for Kohl's and Macy's, respectively. These healthier fiscal positions also allow Kohl's and Macy's to pay dividends. They currently yield 2.7% and 2%, respectively, whereas J.C. Penney doesn't offer any yield.
J.C. Penney is likely to improve, but not enough to consistently grow during such a difficult macroeconomic environment. Expect a lot of ups and downs. If you want to roll the dice, it can be looked at as a good speculative play. If you're looking to invest in more financially stable operations and like to collect dividend payments, then Kohl's and Macy's will be better options. That said, none of these names may be resilient if the consumer weakens.
Looking for Businesses That Are Resilient?
The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.
The article J.C. Penney Is Turning Itself Around, but Stiff Headwinds Exist originally appeared on Fool.com.
Dan Moskowitz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.