Plano, Texas-based J C Penney Company Inc (NYSE:JCP) finds itself at a critical juncture as it approaches its Nov. 10 earnings announcement. JCP stock has seen a 32% sell-off in the last month in anticipation.
The malls housing JCPenney stores are seeing fewer customers these days. Instead, they seeking items sold at a discount, in bulk, or online. Given this reality, JCP’s place in a retail world dominated by companies such as Wal-Mart Stores Inc (NYSE:WMT), Target Corporation (NYSE:TGT), Costco Wholesale Corporation (NASDAQ:COST), or Amazon.com, Inc. (NASDAQ:AMZN) remains unclear.
The company may find a way to save itself, but it’s seeming less and less likely that there’s salvation for JCP stock.
JCPenney Still Stuck in 1990s
I recently described Rite Aid Corporation (NYSE:RAD) as company lacked a raison d’être, or a reason for being. Unfortunately for holders of JCP stock, JCPenney also appears to lack any reason to exist. The company offers no merchandise, pricing, or, delivery or service offerings that stand out in the minds of customers.
Like other mall-based retailers — think Macy’s Inc (NYSE:M) or Sears Holdings Corp (NASDAQ:SHLD) — JCP is a 20th-century retailer struggling to find its place in the 21st century. As my colleague, James Brumley pointed out, “consumers don’t want to buy what JCPenney is offering — and they don’t want to buy it the way the retailer is selling it.”
The lack of desired offerings has hit JCP stock. With the shares trading below $2.50 a piece, the market capitalization well below the $1 billion mark. That is a low value for a company with more than $12 billion a year in annual sales. However, a $4.5 billion debt burden could easily devastate a company of JCP’s size. Consequently, investors have been reluctant to pick up shares. This is despite the stock trading well below book value and a 0.06 price-to-sales (PS) ratio.
As several of my InvestorPlace colleagues point out, there is a silver lining in this embattled retailer: JCPenney is not Sears. Unlike Sears, JCP fights to stay alive. Lately, they’ve waged this battle by offering deep discounts to customers.
Bleak Financials But All Hope is Not Lost…
As a result, JCP will turn a profit this year. The company expects full-year guidance of between 4 and 8 cents per share. When this guidance was announced on Oct. 27, the stock fell by more than 20%. The company previously guided at between 40 cents and 65 cents per share. The Nov. 10 earnings announcement could provide further insight. However, even 4 cents per share is still a profit, and it buys JCP time to find a raison d’être and save itself. The positive earnings also broke a string of annual losses that had been occurring for several years.
…Except for Holders of JCP stock
Still, the company needs a stronger plan than deep discounting to survive long-term. A savings plan would likely involve multiple store closures to unload money-losing locations. Another might involve bankruptcy to rescue the company from its crushing debt burden. Also,there’s always the possibility of a private equity purchase. To the holders of JCP stock, these options range from mildly positive to disastrously negative.
While the future of JCPenney remains uncertain, most of the positive scenarios offer little to benefit those who hold JCP stock. In addition to the overwhelming debt burden and an absense of a clear reason to exist at all, the company also faces competitive threats on multiple fronts.
As a result, many question the company’s ability to survive. While the company could still turn itself around, the turnaround would not likely benefit its current stockholders. Hence, JCP stock investors who want to buy a cheap stock in hopes of outsize gains should look to a different equity.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.