J.C. Penney Company, Inc. (JCP): Four Signs This Retailer Is at the End of its Rope

Page 1 of 2

“This doesn’t end well,” is a phrase I’ve heard uttered several times by sports broadcasters, usually as a fighter has his opponent on the ropes. This phrase seems to apply perfectly to the current situation at J.C. Penney Company, Inc. (NYSE:JCP). The retailer has problems, and to be quite blunt, the company’s issues aren’t fixable in just a quarter or two. Shoppers have been leaving Penney in droves, and things aren’t likely to get better. Management needs to realize the company should be in survival mode, and yet that’s not happening either. The bottom line is, this doesn’t end well for employees or stockholders.

What Happened?

Honestly the biggest problem facing J.C. Penney Company, Inc. (NYSE:JCP) today is that the company is being forgotten. The old days of choosing between J.C. Penney at one end of the mall and Sears Holdings Corporation (NASDAQ:SHLD) at the other are gone. When companies like Kohl’s Corporation (NYSE:KSS), Target Corporation (NYSE:TGT), and Wal-Mart Stores, Inc. (NYSE:WMT) began opening standalone stores it was the beginning of the end.

Peter Lynch once said that the best measure of any retailer is their same-store sales. He suggested that it wasn’t a big deal to see a drop in same-store sales if the economy was bad or if the weather was unusual. However, when a retailer underperforms its peers on a consistent basis, you know there are bigger issues.

The biggest issue facing J.C. Penney Company, Inc. (NYSE:JCP) is their struggle when it comes to same-store sales. While the past several months were no great sales bonanza for most retailers, J.C. Penney clearly was the worst of the bunch, reporting a 16.6% drop in same-store sales. Of the company’s peers, Target Corporation (NYSE:TGT) actually performed the best with a same-store sales decline of just 0.60%. By comparison, Wal-Mart Stores, Inc. (NYSE:WMT) and Kohl’s Corporation (NYSE:KSS) saw same-store sales declines of 1.4% and 1.9% respectively.

I Thought Everyday Low Prices Were the Solution

It’s amazing to me that a retailer can change to everyday low prices and investors believe this is the solution to the company’s problems. What’s equally amazing is, when the company goes back to promotional pricing and sales, investors believe this is the solution to the company’s issues.

J.C. Penney Company, Inc. (NYSE:JCP)The truth of the matter is that J.C. Penney Company, Inc. (NYSE:JCP) is suffering primarily because shoppers have found other alternatives that offer similar or better quality, and better selection. This brings us to the second problem facing the chain: their gross margin is falling off a cliff. Last year, J.C. Penney commanded a gross margin of over 37%, which is similar to other large mall-based retailers. This year, the company’s gross margin dropped to 30.8%, which is only slightly better than Target Corporation (NYSE:TGT)’s gross margin of 30.7%.

While it’s true that J.C. Penney Company, Inc. (NYSE:JCP)’s gross margin is better than Wal-Mart Stores, Inc. (NYSE:WMT)’s at 24.66%, the latter has been focused on taking grocery market share, which is a historically thin margin business. Kohl’s Corporation (NYSE:KSS), on the other hand, still carries a gross margin of over 36% and seems to have taken J.C. Penney’s place, with higher normal prices and regular sales.

The double-edged sword of J.C. Penney Company, Inc. (NYSE:JCP)’s gross margin dropping is, they are unable to spread their fixed expenses across as large of a revenue base. This has caused the company’s SG&A to jump to nearly 41% of revenue. If this crazy level of expenditures isn’t a solid third reason to avoid the shares, I don’t know what is. To get an idea of just how far out of whack this is, consider that between Kohl’s Corporation (NYSE:KSS), Target Corporation (NYSE:TGT), and Wal-Mart Stores, Inc. (NYSE:WMT), the average SG&A percentage is just under 21%.

You Do Realize You’re Losing Money, Right?

The fourth and most troubling reason to avoid J.C. Penney Company, Inc. (NYSE:JCP) at the current time has to do with their cash flow and capital expenditures. In the last year, the company’s core operating cash flow (net income + depreciation) declined by over 400%.

By comparison, Kohl’s Corporation (NYSE:KSS) reported operating cash flow growth of 1.69%, and excluding Canadian expansion costs, Target Corporation (NYSE:TGT) reported cash flow growth of 0.86%. With Wal-Mart Stores, Inc. (NYSE:WMT) reporting a 2.32% increase in operating cash flow, we can clearly see that J.C. Penney is not only lagging their peers, but the situation looks extremely serious.

As if the decline in operating cash flow wasn’t bad enough, management decided that doubling their capital expenditures versus last year somehow made sense. The company is losing sales left and right, their gross margin is declining severely, and management at the top has just changed. Spending twice as much on capital expenditures appears to show a severe lack of judgment.

Page 1 of 2
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

On the Move: The 10 Fastest Growing Businesses in 2015

Fast Money: The 10 Highest Paying Fast Food Restaurants

Mixing It Up: The 14 Best Music Mashups of 2014

Rito Pls Buff: The 10 Least Played Champions in LoL Season 4

10 Covers of Popular Songs that are Better than the Originals

Must See TV: The 9 Most Anticipated Shows of 2015

The 15 Biggest Box Office Bombs of All Time

10 Things The World Can’t Stand About Americans

Picture Perfect: The 6 Smartphones with the Best Cameras

The 10 Best Countries To Work In the World

A Profitable Day At The Track: 5 Tips For Betting On Horses

Tearing You Apart: 6 Bad Habits That Ruin Relationships

Learning on the Job: The 6 Biggest Mistakes Parents Make

Shopaholics Rejoice: The 12 Biggest Malls in the World

Fright Night: 10 Horror Movies Based on True Stories

Mach Mania: The 10 Fastest Jets in the World

Military Heavyweights: The 10 Countries with the Most Tanks

All In: The 7 Richest Poker Players in the World

Abracadabra: The 10 Best Magicians in the World

The 10 Richest Asian Countries in the World in 2014

Eyes in the Sky: 10 Things You Need to Know About Drones

Rising Stars: The 6 Best Silicon Valley Startups

Military Muscle: The 5 Most Advanced Armies in South America

All that Glitters: The 7 Most Luxurious Jewelry Brands in the World

5 Things You Didn’t Know About ISIS but Should

Empowering Your Money: The 5 Best Energy Stocks to Invest In

The 11 Best Android Apps You Can’t Get on iOS

The 10 Most Important International Conflicts in 2014

Mood Enhancers: The 20 Most Uplifting Songs of all Time

Lover Beware: The 8 Countries that Cheat the Most

Breath of Fresh Air: The 25 Countries with the Best Air Quality on the Planet

Singles Beware: The 8 Worst Mistakes Made on First Dates

Healthy and Happy: The 10 Countries with Lowest Healthcare Costs

The 6 Best Company Team Building Activities to Build Workplace Camaraderie

Ships Ahoy: The 10 Busiest Shipping Ports in the World

10 Productivity Tips to Save You Time and Help You Do More With Less

Grab a Bite: The Most Popular Fast Food Restaurants in America

Friday Night Thirst: The 10 Most Popular Cocktails in the World

The 6 Greatest Unsolved Mysteries We May Never Figure Out

7 Useless Products You Never Should’ve Bought

The 5 Reasons Why You’re Single and Miserable

The 7 Most Addictive Foods in the World We Can’t Stop Eating (Even Though We Should)

5 Amazing Places You Can Swim with Dolphins

The Top 7 Most Livable Countries In The World

The 10 Most Expensive Baseball Cards Ever Pulled From A Pack

The 5 Easiest Second Languages to Learn for English Speakers

Silver Spoon: The 6 Richest Families in the World

The 20 Countries with the Largest Prison Populations in the World

The Top 10 Richest Actors in the World

The 10 Best Airline Stocks to Invest In Before They Fly Too High

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!