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J C Penney Company Inc (JCP) Stock Is a Falling Machete

If you try to catch JCP stock right now, it'll cut you in half

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Ouch! J C Penney Company Inc (NYSE:JCP) is off more than 15% in late Friday trade after the company reported dismal second-quarter results before the opening bell. That has JCP stock trading at fresh lows of around $4.

A decade ago, it was trading around $80.

It’s safe at this point to call JCPenney a falling machete, let alone a knife, and we all know what typically happens when you try to catch one in midair.

While JCP stock is trading at lows last seen in the 1980s, I still don’t think it has found bottom. That’s because the underlying operations continue to deteriorate, sentiment on retail broadly remains dour, and JCPenney’s balance sheet is loaded with debt.

Here’s the argument for staying away.

JCPenney Is Underperforming Its Peers

Perhaps the most telling aspect of JCPenney’s second-quarter earnings report? JCP was the only one of the four major department stores to underperform on the comparable-store sales front this past quarter.

Nordstrom, Inc. (NYSE:JWN) scored an easy comps beat, with a 1.7% improvement versus expectations for a 0.5% decline. Kohl’s Corporation (NYSE:KSS) also handily topped comps estimates, with a fall of 0.4% coming in 100 basis points better than expected. Macy’s Inc (NYSE:M) recorded a miserable 2.5% decline in comps, yet the consensus estimate for 3% was too low.

JCPenney delivered a 1.3% dip in comparable-store sales, missing expectations (albeit narrowly) for a 1.2% drop.

But that’s not the only place JCPenney looked worse than its peers.

The retailer’s gross margins were killed in Q2, falling a full 200 bps year-over-year. Gross margin growth is critical, as it indicates a company’s ability to stabilize average selling prices in the midst of a markdown-heavy environment.

Unfortunately for investors, JCPenney appears to be getting hit by markdowns much worse than its peers.

Again, Nordstrom reported a mere 25-bps compression of gross margins, primarily because of higher occupancy expenses related to new store growth for Nordstrom Rack. Kohl’s said gross margins were essentially flat last quarter and sounded optimistic about improvement going forward. Macy’s, meanwhile, reported gross margin compression of just 60 basis points — a much more modest decline than most expected.

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