Blowout Black Friday weekend shopping numbers is creating a rising tide that is lifting all names in retail. But that doesn’t mean I am a suddenly a fan of much maligned J C Penney Company Inc (NYSE:JCP) or JCP stock.
By most estimates, the Black-Friday-through-Cyber-Monday shopping period was really good for all retailers this year, even really beaten-up names like JCP. Digital sales growth was broad-based and came from multiple different names (not just Amazon.com, Inc. (NASDAQ:AMZN)), while brick-and-mortar foot traffic declines are moderating.
But a strong end-of-November showing doesn’t dramatically alter the “down and out” narrative for JCP stock.
Strong Black Friday Showing for JCP
Both JCP and Macy’s Inc (NYSE:M) have come out and said that they had strong showings on Black Friday, including robust digital sales growth.
They aren’t lying. Just look at search interest trends. Search interest related to the big department stores was largely higher during Black Friday 2017 than it was during Black Friday 2016.
This is especially true for JCP, which saw search interest spike 15% higher year-over-year in November. Last November, search interest fell 2% year-over-year.
But that doesn’t make JCP stock a buy.
Foot Traffic Still Falling
By most estimates, foot traffic during this all-important shopping period was still down YOY. This means brick-and-mortar retail is still shrinking.
This shrinking won’t end anytime soon — nor will it slow down by much. The U.S. has about 23.6 retail square footage per capita. That is 40% more than Canada, 5 times as much as the United Kingdom, 6 times as much as Japan and 10 times as much as Germany.
When you have something that big shrinking like it is, certain players are doomed to get squeezed out of the mix. The biggest occupants in those malls are department stores like Nordstrom, Inc. (NYSE:JWN), Macy’s Inc (NYSE:M), and JCPenney. Thus, the guys most likely to be squeezed out of the mix are department stores.
But they won’t all be squeezed out; just the worst ones. And for a long time now, JCP has been the worst department store, due to its lack of differentiation from digital retail.
It is important to note that, although JCP did have a strong Black Friday showing, management has not updated guidance. And the most recent guide from JCP is quite ugly. It underscores a big problem with the struggling retailer: the store can’t drive traffic unless it runs heavy promotions.
When you are already running on narrowly positive profit margins and a have ton of debt on the balance sheet, you can’t really afford to cut margins much more. From this standpoint, I don’t really see JCP being able to grow both margins and comps in the foreseeable future.
Valuation on JCP Stock Is Too Rich
I also don’t really see how JCP stock heads any higher without both margin and comp growth.
JCP stock is already trading at 59 times this year’s earnings estimate. The only reason you buy JCP stock here is if you think that earnings can explode higher. But that only happens with positive comparable sales growth and margin expansion.
JCP hasn’t been able to grow both together in this challenging retail environment. Thus, at 59x this year’s earnings estimate, JCP stock looks way overvalued.
Bottom Line on JCP Stock
The struggling retailer had a strong Black Friday showing, so the stock is rallying alongside the rest of the retail sector.
But if you are going to play the resurgence in retail, there are much safer ways to play it than paying 59x earnings for JCP stock. Take a look at Macy’s stock, trading at 7x this year’s earnings, or Nordstrom, trading 15.5x this year’s earnings.
Those are much cheaper stocks with much stronger growth narratives. I like both of them, as well as Kohl’s Corporation (NYSE:KSS) and plethora of teen retail names like Gap Inc (NYSE:GPS), Urban Outfitters, Inc. (NASDAQ:URBN), Tilly’s Inc (NYSE:TLYS) and Abercrombie & Fitch Co. (NYSE:ANF).
In other words, I’m bullish on retail… but not JCP. Too much debt, a big valuation and the inability to grow comps alongside margins keeps me bearish on JCP stock.
As of this writing, Luke Lango was long JWN, M, KSS, URBN, TLYS, GPS, and ANF.
