Like every car accident you’re forced to drive around, you just can’t help but gawk at the perpetually worsening disasters playing out at JCPenney (JCP) and Sears Holdings (SHLD). And, although it has become cliche at this point, it’s equally impossible to resist wondering whether JCP stock or SHLD stock will reach the grave first.
It hasn’t been an easy race to handicap. Both retailers seem to have developed a near-weekly habit of giving owners of JCP or SHLD stock a new reason to dump their positions.
For instance, last week’s hit on the value of JCP stock was the announcement that the SEC was going to be poking around a bit, looking for more information regarding the timing and prompting of October’s secondary offering. Meanwhile, Sears officially told us last week that it would be spinning off its Land’s End division. It’ll relieve some financial pressure in the near-term, but Land’s End was carrying more than its fair share of the organization’s financial burden, so it’s not exactly a triumph for SHLD stock.
With all of that being said, it looks like one of the two contenders has taken the lead in their race to the end of the road.
JCP Stock: JCPenney Needs to Get Back to Basics
First and foremost, the SEC inquiry is unlikely to unearth anything particularly troubling for JCP stock.
High-profile turnaround stories like the one JCPenney is attempting tend to garner plenty of attention, not to mention drive speculation, which will inevitably lead to an above-average number of investor complaints.
While dilution via the sale of JCP stock (particularly following a comment from the CEO that the company was plenty liquid) is annoying, it’s not improper or illegal. That’s not to say the mere implication isn’t acting as a drag on JCP stock in the meantime, though.
Even once the inquiry is a fading memory, JCPenney still will face a growing number of potentially insurmountable challenges.
While liquidity remains a hot button, at this point it’s not actually the biggest detail JCP stock holders want to focus on; the company has proven it can reconfigure debt and its line of credit as needed to buy time. The biggest hurdle is once again the original one — generating more sales, and turning more of that revenue into a profit.
Obvious? Yes, but not an insignificant problem.
Bloomberg calculates that over the past four quarters, gross margins of 27.9% (of revenue) for JCP stock is the lowest among the industry’s major comparable retailers; the average has been right around 38.4% during that time. The company’s selling and administration expenses are also the highest among the same group.
Were JCPenney able to get the right merchandise in the right place at the right time, the vehicle is in place to improve JCP stock margins and lower (relative) expenses.
Playing a balance-sheet shell game doesn’t accomplish the task, however.
SHLD Stock: Sears Needs to Hurry Up With the Breakup
It hasn’t been terribly surprising that hedge fund manager, majority owner of SHLD stock and current Sears CEO Eddie Lampert has turned the company into a real estate play. Many observers hypothesized the possibility way back in 2005 when Kmart and Sears united under the Lampert umbrella.
He hasn’t disappointed, shedding about a dozen stores during the past year-and-a-half, and closing about 300 stores since 2010. More are likely to be on the chopping block, along with the company’s automotive centers.
And truth be told, were SHLD frozen in time, the math might make sense. Baker Street Capital estimated in September that the company’s top 350 stores (out of roughly 2000) were worth $7.3 billion, vs. Sears’ current market cap of $5.08 billion.