I’ve been bearish on J.C. Penney (NYSE:JCP) stock for a long time. My bearishness dates back to mid-2017, when JCP stock was trading hands around $5. The bear thesis back then was that this was an increasingly irrelevant, debt-burdened, and unprofitable mall retailer crawling its way towards the retail graveyard.Fast forward two years. That bear thesis has largely played out, and the JCP stock price is below $1.
The bear thesis remains relevant today. JCP isn’t a company crawling towards a smaller existence. It is a company crawling towards the graveyard. Thus, even though the JCP stock price is under a dollar now, this is not a stock to buy.
Instead, JCP stock should remain on your sell list because $0 is a very realistic end result for this stock. Because of this, until J.C. Penney puts up numbers that put to rest bankruptcy concerns, I will continue to avoid JCP stock.
J.C. Penney Heading for the Graveyard
The secular bear thesis on J.C. Penney stock is very straightforward.
Once upon a time, J.C. Penney was a very important and relevant retailer. That was back in 2007, when J.C. Penney stores were at the center of every mall, and malls were at the center of the retail world.
Times have changed since then. Retail consumption has shifted from the physical to the digital channel, and malls have lost their position as the epicenter of the retail world. In response, malls have been forced to shut down or reinvent themselves — and those reinventions often include swapping out apparel stores like JCP with experience-oriented stores that cannot be replicated online, like restaurants, movie theaters, or gyms.
From this perspective, J.C. Penney has gone from the center of the retail universe, to an increasingly irrelevant player in the retail universe. Unfortunately, management didn’t take the necessary steps to mitigate this secular demise. They didn’t build out a huge digital business to offset declines in the physical business. They didn’t establish omni-channel capabilities to keep the physical business relevant, or put money back into the stores to improve store presentations.
As such, for the past several years, J.C. Penney has been defined by negative comparable sales growth, margin compression, and huge losses. All of that is happening against the backdrop of a debt-burdened balance sheet, meaning that JCP doesn’t have the resources or the time necessary to execute all the changes it needs to make to become relevant again. Meanwhile, the rest of the retail industry continues to innovate and push forward.
Thus, the most likely outcome for J.C. Penney is that it will continue to lose relevance in the retail universe. As that happens, comps will remain negative, margins will keep falling, and losses will keep piling up. Eventually, those piling up losses will trigger a bankruptcy filing, given the huge debt load on the balance sheet, and JCP stock will tumble towards zero.
Next Quarter’s Numbers Won’t Be Good for JCP Stock
Even dead ducks sometimes have a good day. That is to say, even though the secular bear thesis on JCP stock is very compelling, this stock could bounce in a big way if the company reports strong earnings which refute that bear thesis.
Unfortunately, that won’t happen anytime soon for JCP stock. Department stores have been the eyesore of the struggling retail sector for several years now, mostly thanks to Amazon (NASDAQ:AMZN). Nothing about this trend has changed recently. Over the past three months, while retail sales are up 3.4%, department store sales are down 5.9%.
There’s evidence that this trend only got worse for department stores over the past three months. The 5.9% second quarter decline compares unfavorably to the first quarter decline of 3.8%, while broader retail sales trends actually improved sequentially.
Consequently, investors should expect more bad numbers out of department store operators this quarter. J.C. Penney is the consistent worst performer in this group. As such, it’s likely the company reports numbers that are pretty ugly next quarter. Those ugly numbers won’t refute the bear thesis, but reinforce it. In so doing, they will provide an additional drag on JCP stock.
Bottom Line on JCP Stock
JCP stock has been in a secular downtrend for the past 12 years. This downtrend won’t end anytime soon. Instead, this company will likely follow in the footsteps of Sears, meaning the end-all price target here is zero.
As of this writing, Luke Lango was long AMZN.