The End Might Be Near for J.C. Penney
Troubled retailer J.C. Penney needed a big holiday season in order to convince investors that the turnaround was making progress. November showed some progress for the retailer, with the company previously announcing that same-store sales jumped by 10.1% during the month, but concerns over heavy discounting led to questions about the sustainability of these increases.
It seems that these concerns were warranted, because on Jan. 8, J.C. Penney sent out a press release regarding its holiday sales which contained no hard data whatsoever. The release stated that the company "is pleased" with its performance and that previous guidance for the fourth quarter is unchanged. Failing to report an actual number was viewed as a bad sign, and the stock sank as a result.
With a difficult retail environment causing other low-end retailers like Sears Holdings and Family Dollar Stores to report abysmal holiday sales, it's possible that J.C. Penney actually saw same-store sales decline during the holidays. This is far from the double-digit growth needed to give the company a fighting chance, and it could spell the end for J.C. Penney.
Treating shareholders poorly
The decision not to announce holiday sales data is a big disservice to shareholders betting on a successful turnaround. We'll learn the results eventually, with J.C. Penney set to report earnings in late February, but the lack of information doesn't do the company any good in trying to get shareholders to believe in its turnaround story.
This isn't the first time that J.C. Penney has wronged its shareholders. Back in September, hours after CEO Mike Ullman reportedly stated that J.C. Penney wasn't planning to raise any new capital, the company issued 84 million new shares, underwritten by Goldman Sachs. This caused significant dilution for current shareholders, who were led to believe that the company wasn't planning to issue any new shares anytime soon.
Getting shareholders behind the turnaround story is important, and the shareholder-unfriendly actions of J.C. Penney do nothing but drive down the stock price and make any future equity offerings more difficult. And given the company's precarious finances, another capital raise may be inevitable.
A deep hole
With every passing day, a successful turnaround for J.C. Penney seems increasingly unlikely. Because of the massive decline in revenue during the Ron Johnson era, J.C. Penney needs to grow same-store sales in the double digits without resorting to the profit-killing discounting that has skewed the data thus far. The company has a limited time to accomplish this, as continued losses eat away at the available liquidity, and the situation at J.C. Penney is starting to look untenable.
We'll get a fresh look at the balance sheet when J.C. Penney reports earnings in February, but I expect things to continue to deteriorate. Debt has exploded in the past year, rising to nearly $5.5 billion at the end of Q3 2013. This is up from just $2.9 billion at the end of Q3 2012, and the increase in debt has led to the ballooning of interest payments. This interest is one of the big barriers to J.C. Penney's profitability, and I suspect that the company will eventually succumb to its debts.
Retail sales rise but leave some behind
While holiday sales rose by 3.8% compared to 2012, many retailers were forced to discount heavily in order to keep up. It seems that low-end retailers were hit the hardest, putting J.C. Penney in the company of Sears and Family Dollar, both of which have already reported lackluster results.
Sears, which operates both Sears stores and Kmart stores, saw significant declines across the board. Sales fell by 5.7% at its Kmart stores while plummeting 9.2% at its Sears stores, a result which puts the future of Sears into question. Much like J.C. Penney, Sears is attempting to remain relevant as it turns itself around, and much like J.C. Penney, it is failing at that task.
Family Dollar, another discount retailer, saw its same-store sales decrease by 2.8% during the holiday quarter. Net income fell a bit as extensive store renovations over the past year have failed to pay off for the retailer, and it seems that the low-income customers that Family Dollar caters to are being squeezed the hardest by the current economic conditions.
This trend of pressured low-income shoppers bodes poorly for J.C. Penney going forward, and with the economic recovery creating mainly low-income jobs, it doesn't look like the situation will get better anytime soon.
The bottom line
J.C. Penney's lack of information regarding its holiday sales leads me to believe that the company did poorly over the holiday season, with heavy promotions failing to boost revenue considerably. The company's turnaround story is full of holes, and it's looking more likely every day that the unrelenting flow of time will ultimately bury J.C. Penney.
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