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Why J.C. Penney Company, Inc. (JCP) and Hewlett-Packard Company (HPQ) Are Twin Sisters

A turnaround story

There’s always some turnaround story going on for J.C. Penney and Hewlett-Packard Company (NYSE:HPQ). The former keeps trying to reinvent itself. Johnson’s first move as CEO was to rebrand J.C. Penney Company, Inc. (NYSE:JCP) as “JCP.” He also abandoned the retailer’s coupon program in favor of “fair and square” pricing. And he worked to make the department store more upscale by introducing a “store within a store” concept, where brands would have their own shop within a Penney store. But that didn’t help. When the coupons left, so did the customers. Johnson eventually admitted his error and reintroduced discounts. And while the updated stores did enjoy higher sales per square foot, it wasn’t enough to stop the downward spiral.

HP is also a big fan of reinventing itself.
Hewlett-Packard Company (NYSE:HPQ) was caught with her pants down when everyone stopped getting excited about printers and ink. So it decided to become more “tech like.” Over the past decade it purchased desktop-computer brand “Compaq” and, more recently, the mobile device-maker Palm. As you can probably guess from the names, both turned out to be horrible investments that cost the company dearly.

Wal-Mart, on the other hand, has no need to reinvent or re-brand itself. Its business model is strong and decisive – It’s globally known as a low-cost retailer that profits from scale and size. You can see all that by looking at the company’s cash flow statement. In contrast to
J.C. Penney Company, Inc. (NYSE:JCP), which burns through $1.3 billion per year, Wal-Mart has raked in more than $4.3 billion of cash flow in its last quarter alone.

Debt, and lots of it

In most cases, a turnaround story is a very costly business. Companies that attempt some sort of a turnaround end up with balance sheets loaded with debt. HP and J.C. Penney are no different. HP is currently sitting on $29.7 billion of long- and short-term debt on its balance sheet and total liabilities of around $85.5 billion. It has so much debt because the company has made horrible acquisitions over the years. Similarly to Hewlett-Packard Company (NYSE:HPQ), J.C. Penney indulged in debt as well. It has total liabilities that exceed $6.5 billion, while the company’s total market cap is only $3 billion. Not a very conservative scenario indeed. Wal-Mart Stores, Inc. (NYSE:WMT), on the other hand, makes all that money without loading its balance sheet with massive debt. The company’s current liabilities stand at $70 billion. That’s roughly about only a quarter of the company’s market cap. Not very aggressive by all means.

The Foolish bottom line

Before you invest in a company, you must first ask yourself whether it can pass the “Wal-Mart test.” That company must be a cash flow monster with decisive management, bullet-proof business model and a conservative balance sheet. If it doesn’t pass that test, don’t invest in it. Otherwise, it may end up like J.C. Penney or HP at some point.

The article Why J.C. Penney and HP Are Twin Sisters originally appeared on is written by Shmulik Karpf.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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