JC Penney Shares Collapse

One sign of just how much opinion about J.C. Penney has eroded comes from the share price of Sears Holdings Corp. (NASDAQ: SHLD), the parent of Sears and Kmart, and widely considered the worst-run retailer in America. Its shares have traded flat in the past month. However, one difference between the two companies stems from a belief that J.C. Penney might have started a recovery. No one believes a recovery of Sears could happen.

But the J.C. Penney recovery could be destroyed, unless it shows a surge in same-store sales. Those sales may be higher by 4%, based on a forecast released by management. What the data do not tell is how much ground J.C. Penney has to make up to return to the sales levels before its collapse under a new chief executive, who was fired quickly in mid-2013, and the management that stepped in to replace him.

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During fiscal years 2012, 2011 and 2010, J.C. Penney posted revenue of between $17 billion and $18 billion. This was down from nearly $20 billion in fiscal 2008, which triggered the board’s decision to hire new management. Immediately after the change at the top, J.C. Penney revenue fell to under $12 billion in fiscal 2013. To recover to the revenue of five years ago, the top line would need to grow over 40%. That is improbable.

J.C. Penney has cut enough costs that it might be make money at lower revenue levels, compared to $17 billion a year. However, at its current level, it has lost market share that it almost certainly cannot recover in a sector with ruthless competition and small margins. Modest growth will not solve J.C. Penney’s problem.

J.C. Penney’s trouble extends to its store count, which sits above 1,000. For a retailer with its problems, some of these locations have to lose money. Management has not acknowledged the problem by shuttering dozens of them.

J.C. Penney management has not proved that any sort of sustainable recovery is possible, unless it makes more drastic decisions to restructure the company. And there are no signals that will happen.

Recent management, oddly, includes Mike Ullman, who was sacked when sales first began to drop six years ago. Brought in to engineer the turnaround of a turnaround, it is difficult to see why the board would retain him. The problem probably partly arises from the fact that the board is largely retired executives who do not have full-time responsibility elsewhere

So what does J.C. Penney have to accomplish short term? The first is to hit its recently reported numbers.

As filed with the SEC:

On April 13, 2015, J. C. Penney Company, Inc. (the “Company”) became aware that a senior official of the Company inadvertently sent an e-mail communication to a securities analyst that contained non-public information regarding the Company’s comparable store sales results for the fiscal first quarter of 2015 to date, which are approximately 6 percent. Based on results to date, and taking into account the shift of Easter into the fiscal month of March this year, the Company currently expects comparable store sales for the first quarter to be in the range of 3.5 to 4.5 percent.

It is a sucker’s bet to buy or hold a stock based on a single quarter. J.C. Penney, in particular, has proved that to the market time after time.

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