Steer Clear! JCP Stock Is Nowhere Near the Bottom

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J C Penney Company Inc. (NYSE:JCP) has been in a slump for the past 5 years. The department store found itself caught in the retail apocalypse along side most of its peers as Amazon.com Inc. (NASDAQ:AMZN) transformed the industry with its online shopping mecca.

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Now, as retailers scramble to beef up their online presence and create shopping ‘experiences’ that will draw in foot traffic, investors have to choose wisely if they’re going to take a chance on the beaten down sector.

JCP stock is down more than 50% so far this year, which might interest speculative traders looking for a bargain- but don’t let the beaten down share price fool you. JCP’s valuation is more than fair and buying in now means you might end up catching a falling knife.

What About Those Earnings?

J C Penney reported second quarter results in mid-August and the release focused on the fact that top-line growth improved. Net total sales increased 1.5%, a sharp turnaround from the decline the firm posted just a quarter before.

JCP management pointed to its improved customer loyalty scheme and a strong performance by apparel as reasons for the increase, but there was more than meets the eye to the J C Penney financials that were reported.

First of all, JCP’s comparable sales showed a 1.3% decrease and the company closed more than 100 stores at the end of August. The reason this is relevant is that the store closures included massive liquidation sales which almost certainly pumped up overall sales growth but were excluded from comps. In fact, a closer look at the results show that the store closures added $79 million worth of revenue. The remaining stores, on the other hand, produced a $35 million decline in revenue.

Not only does this paint a worrying picture for the future of JCP stock, but it also calls into question the transparency of management at J C Penney. Instead of telling the truth about an ailing organization, the firm gloated over a temporary sales increase that came primarily from liquidation sales.

Retail is a Tough Space

The other problem with choosing JCP stock right now is that the company operates in the retail sector. There are a lot of retailers other than Amazon who are thriving despite the changing landscape, but those diamonds in the rough are few and far between. More importantly, JCP is not one of them.

Not only is J C Penney operating in a difficult environment, but the firm is also fighting at a disadvantage with beaten down finances and the inability to revive store traffic. So far, JCP hasn’t been able to produce a convincing turnaround plan and that’s worrisome because it’s been 10 years since JCP traded at all time highs of $84 per share. The firm needs a solid plan for the future yesterday- last year even.

Too Little Too Late

J C Penney says it’s planning to invest in better technology, a move that it says will cut costs and drive new sales. CFO Jeffrey Davis has said that is experience in “more data-rich environments” will help turn things around for JCP. Maybe that’s true, but I am doubtful that improving technology this late in the game will be enough to reverse the firm’s downward trajectory.

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J C Penney’s future guidance calls for the firm’s same store sales to fall somewhere between minus one percent and plus one percent, but many are expecting to see the figure come up on the lower end of the spectrum. Not only that, but the firm has consistently disappointed when it comes to comps in the past, and based on management’s praise for what most considered to be a disastrous quarter, I don’t have a lot of faith in their optimism.

The Bottom Line

There are way too many negatives stacked against J C Penney to make it a worthwhile investment right now. The firm carries a worrisome amount of debt and has yet to prove that it can come out from under the shift in the retail space. Perhaps after another round of asset sales and debt pay downs the firm will be able to better manage a leaner organization and improve sales for real. However, for now I’d steer clear because the JCP stock price is likely to fall further before it makes any kind of a recovery.

As of this writing, Laura Hoy was long AMZN.

Marie Brodbeck has a Finance degree from Duquesne University and has been a financial journalist for more than a decade. Her work can be seen in a variety of publications including InvestorPlace, Benzinga, Yahoo Finance and CCN.


Article printed from InvestorPlace Media, https://investorplace.com/2017/09/jcp-stock-near-bottom/.

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