J C Penney Company Inc (NYSE:JCP) continues its fight for survival. The stock dropped to single digits as online competition and mounting losses drove JCP stock downward. New strategies and asset sales have brought the company back to profitability during the Christmas season.
However, as the company remakes itself and employs the limited options available to save itself, the question remains whether the company can save both itself and its stock.
JCP Stock Has Arrested Its Decline for Now
In a previous article, I referred to JC Penney as a “20th-century retailer struggling to find its place in the 21st century.” The good news for JCP shareholders is that the company has engaged in a more vigorous struggle to survive. CEO Marvin Ellison has worked to change that image.
Under Ellison, the company has tried initiatives such as the Jacques Penne website, a big and tall clothing partnership with Bombfell.com. JCP has also reintroduced appliance sales at some locations.
As our own James Brumley points out, these initiatives are not game-changers but they draw interest where it did not exist before. Further, appliance sales could become a lucrative niche after a likely closing of Sears Holdings Corp (NASDAQ:SHLD) stores reduces competition in this area.
The JCP stock price has risen 40% since I wrote that article, albeit on a roughly $1 per share increase in the value of shares. At the end of the day, it’s not as bad off as Sears.
It’s also not as well off as its fellow mall retailer Macy’s Inc (NYSE:M) or Kohl’s Corporation (NYSE:KSS). Both Macy’s and Kohl’s have managed to remain profitable despite the rise of Amazon.com, Inc. (NASDAQ:AMZN) and other online retailers.
Debt Remains the Overriding Concern on JCP Stock
Unfortunately, one overriding negative plagues JCP that the positives cannot overcome—debt. The current market cap stands at around $1 billion. The company carries over $4.5 billion in combined short and long-term debt. This is down from over $5 billion in 2016.
That level of debt will remain dangerous no matter what happens with the stock. Even under the most optimistic profit forecasts, analysts do not expect high enough profits to make a serious dent in debt levels.
Two solutions to the debt problem remain, only one of which has the possibility of benefitting holders of JCP stock. The first remains one strategy it’s already employing, selling real estate. The company sold its Plano, Texas headquarters building for $353 million in 2017 to bring about some debt reduction. It also sold a distribution center in Buena Park, California for $131 million in May.
A Cushman and Wakefield analysis in 2013 estimated a value of over $4 billion in real estate assets at that time. This included the headquarters, distribution centers, and the 306 of its stores the company owned at the time. A separate study by Morgan Stanley valued the property at $5.9 billion. Hence, the possibility exists that store sales could bring debt to manageable levels.
The only other solution to its debt problem remains bankruptcy. Declaring bankruptcy could produce enough debt relief to make the company solvent. However, such a declaration comes at the expense of current JCP stockholders. It’s this fact that makes an investment in JCP stock a risky venture. However, the company would likely sell more real estate before attempting Chapter 11.
Final thoughts on JCP Stock
Questions remain as to whether asset sales and better product mixes can save the stock. Under the new CEO, the company has changed its product mix. This has inspired interest in J C Penney that has not existed for many years. Further, asset sales bring in much-needed cash to reduce a crushing debt load.
However, the company still struggles with profitability outside of the Christmas season. Also, its new strategies may not prevent the need to declare bankruptcy to reduce its debt load. However, if one wants to gamble on J C Penney stock avoiding bankruptcy, it could become highly profitable once debt levels come down to manageable levels.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.
