Does J.C. Penney Need to Close 100 Stores?

Retail

Published: November 14, 2014 11:00 am

Last Updated: November 14, 2014 11:01 am

After a year of 20% or more drops in same-store sales and revenue, under former CEO Ron Johnson, J.C. Penney Co. Inc. (NYSE: JCP) has pulled itself to a level at which it is not growing at all. Relatively, it may be a victory, but not much of one. The retailer has more than 1,000 stores, and J.C. Penney still loses money. So it stands to reason many locations are not profitable. Then why does the retailer keep them? The answer may be that it will not keep them all for long.

In its most recently reported quarter, J.C. Penney revenue was flat at $2.7 billion. The retailer lost $188 million. Worst all, same-store sales for the period were flat from the same quarter last year. Comparable store sales are expected to grow as little as 2% in the current quarter, the most important quarter for retailers due to the holiday season. If sales do not surge now, when will they?

J.C. Penney is not in the process of disappearing. At the end of most recent quarter, it had “over $1.9 billion in total available liquidity.” However, surviving is not a viable goal for J.C. Penney. Eventually, and soon, it has to thrive.

As of the end of its last fiscal year, J.C. Penney had 1,094 stores. Most have certainly been at their locations for years, perhaps decades, which means the population and demography around the stores may have changed substantially. The company has 19 stores in Iowa, and the same number in Kansas, Maryland and Oklahoma. A coincidence for certain, but the demographics in each of the states has changed substantially over the years, and not always in the same direction.

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One of the reasons J.C. Penney has not already closed stores is covenants in loan agreements. When Radio Shack Corp. (NYSE: RSH) tried to close more than 1,000 stores earlier this year, bondholders objected. An operating decision that made sense was reversed. Radio Shack still needs to close a large number of stores to survive.

How many stores does J.C. Penney need to close? No one knows how many lose money, other than management and the board. But at a retailer that is bleeding, 10% is almost certainly not too high an estimate. If holiday sales are poor, J.C. Penney may be left with few choices.

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