Consumer confidence remains strong, job growth is robust and incomes continue to rise. But none of that has really mattered much for J.C. Penney Co. (NYSE:JCP), which has had a horrible year. Consider that JCP has become a penny stock, with JCP stock price today hovering around $1.05. And in 2018, JCP stock has tumbled a grueling 70%.
But of course, JCPenny stock hasn’t done well in quite some time. Its average annual return for the past five years is -31.62%. The result is that the market cap of JCP stock is currently a lowly $375 million, even though the company still posts annual revenues of over $12 billion. Consequently, the price–sales ratio of JCP stock is a mere 0.03.
OK, so what now? Could JCP make a comeback soon? Or should investors just avoid JCPenney stock?
Given the deep and serious challenges facing the company, it’s probably best to stay away from JCP stock. Here are some reasons for that advice:
JCP’s Leadership Transition
Restructurings are always tough, especially when the CEO leaves in the midst of them. And that happened to JCP, when Marvin Ellison left the company in May to become the CEO of Lowe’s (NYSE:LOW). Four years into Ellison’s tenure, his initiatives – – such as placing a greater focus on appliances — had not gained much traction. The company’s revenues remained stagnant, and its losses continued to rise. Ellison’s departure was ominous because it was a sign that he did not expect the company’s results to improve much going forward.
It was not until mid-October that JCP found its next CEO, Jill Soltau. She was previously the CEO of JOANN, a specialty retailer that sells fabrics and crafts at over 850 stores in 49 states. During Soltau’s time at the helm of the retailer, she helped improve its marketing strategies and digital platform.
But she will need time to evaluate JCP, and it will take even more time for her initiatives to affect JCP stock.
Failed Merchandising And Black Friday Underperformance
After the bankruptcies of retailers like Sears (NASDAQ:SHLD), Toys R Us, Nine West and The Bon-Ton Stores, JCP is facing less competition. But unfortunately, that hasn’t helped JCP much. Instead, it’s been the mega retailers like Target (NYSE:TGT) and Walmart (NYSE:WMT) that have capitalized on the disruptions in the retail market.
So why hasn’t JCP been able to exploit those bankruptcies? One reason is that the company’s merchandising strategy has mostly failed. In the third quarter, JCP reduced its inventory by 5.4% , and it looks like the liquidation isn’t over. As a result, the company will have trouble boosting its sales, and its margins will probably continue to be pressured.
Meanwhile, the holiday shopping season appears to have gotten off to a slow start for JCP. According to Placer.ai, JCP’s foot traffic on Black Friday was up a mere 1% year-over-year. By comparison, TGT’s foot traffic jumped 16% and WMT gained 12%.
JCP’s Financials
There was little to like about the company’s third-quarter results. Its total sales plummeted 5.8% year-over-year to $2.65 billion, and its comparable-store sales fell 5.4%. Moreover, JCP reported a net loss of $151 million. The only annual guidance provided by JCP was its outlook on same-store sales, which it expects to fall by low-single-digit percentage levels.
Granted, JCP stock could get back on track if the company is able to improve its business, by, for example, enhancing its merchandising and e-commerce, as well as the layout of its stores.
But one problem is that, since JCP has limited resources, its restructuring will probably be mostly focused on cutting jobs and closing stores. Those moves won’t restore JCP’s growth or tremendously boost JCP stock.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
