Earlier this month, J C Penney Company Inc (NYSE:JCP) hit a new 52-week low. It was just below the previous low hit in mid-August, and JCP stock is now down 58% on the year. At some point, it may be worthwhile buying the stock, but is it now?
The shift in retail has been seismic. Despite the economy humming at a solid pace with record-low unemployment and some of the strongest data since the Great Recession, there’s been an unbelievable amount of bankruptcies in retail. If broken companies aren’t filing for Chapter 11, they’re closing stores left and right. Even many of the retailers that are doing well are shuttering or scaling back their expansion plans.
Amazon.com, Inc. (NASDAQ:AMZN) and others have dealt a serious blow to department stores. Mall traffic is at its lowest levels in decades. Consumers are shopping at discount stores like Nordstrom Rack by Nordstrom, Inc. (NYSE:JWN), TJX Companies Inc (NYSE:TJX) and Burlington Stores Inc (NYSE:BURL).
Can JCP Hang?
Macy’s Inc (NYSE:M), Kohl’s Corporation (NYSE:KSS), JCPenney and countless others have struggled. But where does JCP stock stack up? The company’s market cap has dwindled down to just $1 billion. I know it feels like a long time since Penney’s was relevant, but its demise has been swift. In early 2007, JCP stock was above $80 with a market cap of $18 billion.
Macy’s and Kohl’s haven’t done all that well either. In fact, Macy’s was pitched as a top pick at the Delivering Alpha conference just a few years ago. A big part of that premise was its real estate value, arguing that shares could be worth $125. Whoops.
And while Macy’s has struggled too, at least it’s consistently profitable. It also generates close to $1 billion in free cash flow (FCF). KSS isn’t as good a performer as Macy’s when it comes to FCF, but it’s far better than JCP. JCPenney just got into positive FCF territory in 2015.
Additionally, M and KSS both have huge dividend yields, standing at 7.4% and 5.1%, respectively. While JCP stock hasn’t resumed its dividend since cutting it in 2013. If investors felt compelled to bet against e-commerce and go with a contrarian pick like department stores, I don’t know why they would go with JCP stock over M or KSS.
JCP is a $3.50 stock, and it’s sub-$5 for a reason. And sure, it could pop back to $5 and give investors big gains on a percentage basis, but let’s not act like Macy’s and Kohl’s can’t make similar moves as well.
Drilling Down on JCP Stock
Here’s the big problem with JCPenney. On a trailing basis, JCP sports gross margins of about 35%. That’s not horrible, but its sub-2% operating margins and negative profit margin are a concern. That concern is exacerbated by its lack of sales. Analysts expect a revenue decline of 1.5% this year (fiscal 2018), with similar expectations for next year (fiscal 2019). Analysts expect another decline in fiscal 2020, but let’s not get too ahead of ourselves.
Admittedly, JCP did reduce its SG&A expenses nicely last year (fiscal 2017) vs. the prior year. But the concern lies with the company’s ability to maintain its margins. Should margins come under even more pressure, JCPenney could see free cash flow turn negative, as well as its bottom line. There’s already extremely little wiggle room in operating and profit margins. Arguably, there is no wiggle room.
For the record, Macy’s and Kohl’s do not have stellar margins, either. But they are both better, with Kohl’s being the best in each category. For operating margins, Macy’s stands at 5.6%, while Kohl’s is at 7.4%.
The income statement isn’t pretty, but neither is the balance sheet. In the first two quarters of the year, cash and short-term investments have fallen to $314 million from $887 million. Although seasonally this drop throughout the year is normal, the year-over-year drop of 27% is concerning. Admittedly, total debt is down year-to-date and YOY. But it still stands at $4.3 billion, more than four times JCP stock’s market cap.
On a forward-earnings basis, JCP stock is more expensive than M stock, trading at 9 times earnings vs. just 7.6 times for Macy’s. It’s only slightly cheaper than the 11 times forward earnings that KSS trades.