3 Reasons to Avoid J C Penney Company Inc Stock

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JCP stock - 3 Reasons to Avoid J C Penney Company Inc Stock

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J C Penney Company Inc (NYSE:JCP) has certainly made lots of progress with its restructuring efforts. Yet Wall Street is not convinced. For the year so far, the JCP stock price is off about 55%.

Yet might there be a value opportunity here? Well, based on some key metrics, the JCPenney stock price does look fairly cheap.  Consider that the forward price-to-earnings multiple is only 9.7X and the price-to-sales ratio is a mere 0.09.

It is also important to keep in mind that the company’s finances have stabilized. According to the latest earnings report, JCP retired $300 million in debt and got an extension on its $2.35 billion revolving credit facility.

Oh, and total net sales actually increased 1.5% to $3 billion. The company has been getting traction with categories like fine jewelry, home goods, footwear and handbags.

All this is encouraging, right? True. But the reality is that the JCPenney stock price continues to face significant headwinds. So yes, investors really need to be wary.

Let’s take a look at three key factors:

Issue #1 For the JCP Stock Price: Secular Changes in Retail

As seen with the headlines, there is mostly grim news for traditional brick-and-mortar retailers. The fact is that consumers are increasingly focusing their spending on digital platforms like Amazon.com, Inc. (NASDAQ:AMZN).

The result is that there has been a spate of bankruptcies in the retailer sector, such as with Toys R Us. But even top retailers have not been spared. Keep in mind that the shares of Macy’s Inc (NYSE:M) are off about 40% this year.

Hey, even Nordstrom, Inc. (NYSE:JWN) had to abandon its going-private transaction because of difficulties in obtaining financing.

But technology is not the only cause for the troubles. Many retailers have also not adapted well to consumer tastes or invested in their employees. It also does not help that in-store experiences are often lackluster.

All this has contributed to a long-term deterioration. Based on data from the U.S. Census Bureau, average monthly department store sales fell by a third from 2000 to 2016.

Issue #2 For the JCP Stock Price: Limits of Cost-Cutting

A big part of the turnaround for JCP has been reducing the cost structure. For example, during Q2 the company liquidated inventory in 127 stores that were shut down.

There were also continued reductions in SG&A (Selling, General and Administrative) costs, which fell by $11 million to $842 million. Much of this was due to store controllable costs and corporate overhead.

Yet cost-cutting efforts are mostly short-term. And besides, the overall growth at JCP is likely to remain muted. The fiscal 2017 full-year guidance calls for comparable store sales to range from -1% to 1%.

According to InvestorPlace.com’s Laura Hoy: “I believe that JCPenney stores will keep plugging along, but without making any meaningful improvements to the firm’s finances and without rewarding shareholders.

The upcoming quarters are likely to be disappointing for JCP investors, so I’d steer clear for now until the firm is able to provide some concrete evidence of a real turnaround.”

Issue #3 For the JCP Stock Price: Resources

The recent filing of the Stitch Fix IPO highlights the major issues with the retail space. In fact, the company is likely to have a much higher market cap than JCP stock!

So in the S-1, Stitch Fix points out: “To be relevant today, retailers must find a way to connect with consumers on a personal level and fit conveniently into their lifestyles.

Personalization in retail can be difficult and nuanced, as consumers consider many factors that can be difficult to articulate, including style, size, fit, feel and occasion. We believe that an intelligent combination of data science and human judgment is required to deliver the personalized retail experience that consumers seek.”

Yes, this means that companies need to invest heavy amounts in their digital efforts. But then again, this is something that JCP really cannot do.

For the most part, the company lacks the resources to retool its e-commerce platform, as there is only $314 million in the bank and the free cash flows remain in the negative. In light of this situation, JCP is likely to have difficulties in growing and competing.

Tom Taulli runs the InvestorPlace blog IPO Playbook and is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short SellingFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Tom Taulli is the author of various books. They include Artificial Intelligence Basics and the Robotic Process Automation Handbook. His upcoming book is called Generative AI: How ChatGPT and other AI Tools Will Revolutionize Business.


Article printed from InvestorPlace Media, https://investorplace.com/2017/10/avoid-jcp-stock/.

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