JCPenney (JCP) caught a temporary boost when it reported earnings last week. In fact, it was a big boost, as JCP stock price rallied nearly a buck from its $2.35 bottom to its recent $3.25 high.
If you’re perfect, you caught the 90 cent per share move.
But nobody is — and JCP is far from it too.
Don’t Cheer the JCP Earnings Report
Admittedly, JCP beat analyst estimates for both earnings and revenue. The retailer reported a loss of 33 cents per share on $2.81 billion in revenue, as sales fell 1.7% year-over-year (YoY). Keep in mind though, at the end of October management slashed expectations when it warned on the upcoming quarter.
They were expecting an earnings per share loss of 40 cents to 45 cents. Full-year earnings per share guidance fell to a range of 2 cents to eight cents, from a prior range of 40 cents to 65 cents. These numbers came in way below analysts’ expectations at the time. So in actuality, JCP massively lowered the bar, then beat.
But J.C. Penney is doing better it expected, right? I suppose so, but I just can’t wrap my head around a long thesis here.
Is JCP stock headed to zero? It might. It won’t be this year or in 2018, but it’s clear the odds are stacked against JCP.
While I know it’s possible to capture large moves in these stocks (heck, the JCP stock price went from $2.50 to $3.00 in two days), I don’t trust them.
I don’t trust that as a shareholder, I won’t wake up to an earnings warning and see shares plunge more than 20%, just like JCP stock did a few weeks ago. When I invest, I look for sound businesses.
Is Starbucks (SBUX) sound? Yes. Has the stock struggled? Again, yes. But I am a patient investor and can sit through bouts of underperformance so long as the business is okay. Business at JCP is not okay.
Penney’s Worth a Penny?
It’s not all bad at JCPenney. The company had 1.7% comp-store sales growth last quarter and revenues only fell 1.7% vs. the prior year. For the year, it should still be slightly profitable on an earnings per share basis, while comps should be between -1% to 0%.
Not great, but far from bankrupt. The overall trend, however, is not promising for JCP stock holders.
JCPenney shares are down 65% this year alone and 85% over the past five. Total debt now stands at $4.5 billion versus Penney’s $925 million market cap.
Considering the dramatic changes taking place in retail led by Amazon (AMZN), I worry about JCP’s long-term outlook. I hope they can figure out an omnichannel/e-commerce strategy, a way to boost margins, cut costs, close stores and run a profitable outfit. I just don’t see it happening. It doesn’t have the financial flexibility that some of its peers have.
That’s why JCP reminds me more of Sears than anyone else. Almost everything in its stores can be “Amazon’d.” It will take a while I’m sure, and there will be stock rips higher along the way, but JCP’s fate seems sealed.
Trading JCP Stock Price
When support gives way, it turns into significant resistance for JCP. We saw that at $5.50 and again at $4.25. More recently, we saw it between $3.25 to $3.50. The downward sloping 50-day moving average has also been resistance, (blue ovals on the chart highlight this pattern).
Perhaps JCP stock price will breakout over $3.50 and climb above its 50-day moving average. In fact, over $3.50 accomplishes both of those things and would be quite bullish for JCP. I’m definitely not shorting it here, as the risk/reward is not favorable. But I’m not a buyer, either.
The fundamental story isn’t good, nor is the industry backdrop for department stores. Particularly those lacking financial flexibility. After the fourth quarter, it’s hard to see what catalyst exists to push JCP stock price higher for anything more than a temporary jolt.