The domino effect
J.C. Penney Company, Inc. (NYSE:JCP) shares have fallen as much as 10% today, hitting new 52-week lows in the process, as the market reacts to news that one of its biggest shareholders unloaded a majority of its stake on Monday. Vornado Realty Trust, the retailer’s second-biggest shareholder, sold 10 million shares, or nearly 5% of J.C. Penney’s total shares outstanding, at $16.40. Vornado’s move could be followed by other sales, as one of the company’s biggest defenders, and whose chairman sits on J.C. Penney’s board, seems to be backing away. Bill Ackman’s Pershing Square Capital Management is Penney’s biggest shareholder, with 17.8%.
Foolish bottom line
J.C. Penney Company, Inc. (NYSE:JCP) bulls clearly see the company as a turnaround or a value play, but, amazingly, shares aren’t even that cheap. At a price-to-sales ratio, one of the best valuation metrics for unprofitable companies, J.C. Penney trades for $0.28 for every dollar of revenue, which is much more expensive than other broken retailers. Sears Holdings Corporation (NASDAQ:SHLD) and Best Buy Co., Inc. (NYSE:BBY) go for $0.12; RadioShack Corporation (NYSE:RSH) trades for just $0.07, and SUPERVALU INC. (NYSE:SVU) has a nearly invisible P/S of $0.03. Even healthy retailers aren’t particularly expensive. Macy’s, Inc. (NYSE:M) , perhaps J.C. Penney’s closet rival, is valued at $0.58, and made well over $1 billion last year. Kohl’s Corporation (NYSE:KSS) trades at $0.55 and also made more than $1 billion in profits. Industry heavyweights Target Corporation (NYSE:TGT) and Wal-Mart Stores, Inc. (NYSE:WMT) are valued in a similar range.
The reason is simple. Retail is a low-margin business. Even successful retailers rely on high volumes to make up for low profitability, so sales are valued relatively cheaply. J.C Penney, then, still seems as if it has plenty of room to fall. Johnson’s aura has not worn off; there are still believers in the turnaround.
Rumors have been swirling that the CEO will be out in six months without significant improvement. Johnson notably refuses to give guidance, focusing instead on the story, but retail is ultimately a numbers game. And J.C. Penney’s aren’t adding up.
The article Is This the Beginning of the End for J.C. Penney? originally appeared on Fool.com.
Fool contributor Jeremy Bowman owns shares of Apple. The Motley Fool recommends Apple; owns shares of Apple, RadioShack, and SUPERVALUl and is also short RadioShack.
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