It’s been a rough few years for beleaguered retailer JC Penney (NYSE:JCP). Pushed down by the coronavirus crisis, JCP stock is now trading below 20 cents per share. The firm filed for Chapter 11 bankruptcy protection earlier in May, saying a clean balance sheet would allow it to move forward and thrive in the new retail environment.
But many are skeptical of that plan, and rightly so. Department stores are so far out of fashion right now that reviving a struggling name like Macy’s (NYSE:M) looks difficult enough. Bringing JC Penney back from the dead seems nearly impossible.
Amazon Circles Depressed JCP Stock
When coronavirus hit the markets, investors immediately began talking about the possibility of big-time mergers. The difficult operating environment in which only the strong survive has left some lame ducks exposed. JC Penney is one such sitting duck, and Amazon is a shrewd hunter. The 18 cent price tag of JCP stock makes the firm a compelling acquisition target.
Amazon is reportedly in talks to buy JC Penney, according to rumors started by a publication called WWD. The report, which cited “someone close to the matter,” indicated that Amazon is very interested in snapping up JC Penney’s assets.
But what would Amazon do with a beaten-down department store? There are several possible answers to that question.
The first is that, by acquiring the troubled retailer, Amazon could expand its footprint and cut its costs. While many have been speculating about the possibility of Amazon expanding its private-label apparel via JC Penney’s stores, I’d argue that expanding its vast distribution network and cutting its last-mile costs are likely more pressing issues.
Amazon has been hit by rising delivery costs that it’s absorbed in order to keep up with its rivals like Wal-Mart (NYSE: WMT) that offer more payment and return options. Having smaller, more central locations where customers can pick up their orders makes sense as the firm battles to hold onto its lead in e-commerce.
If Amazon takes over JC Penney’s stores, they could become pickup locations for online customers. That might speed up Amazon’s delivery times and cut Amazon’s costs. Plus, the stores would help the firm cut down its emissions.
Private Label Expansion
Of course, Amazon’s private-label business could be boosted by an acquisition of JC Penney as well. Amazon’s apparel has been gaining popularity over the past year, and the stores would give customers the opportunity to see the merchandise and try it on.
That would reduce costs for Amazon, as the firm would no longer have to process a huge volume of returns.
Not only that, but the growth of Amazon’s apparel business is limited, according to some. Without a space where customers can see and experience the merchandise, the firm may not be able to compete with the likes of Target (NYSE:TGT), where customers can be persuaded to make impulse buys while they’re shopping.
Is an Acquisition in the Works?
There are plenty of reasons why Amazon might want to buy JC Penney, and the fact that JCP stock is trading at such a measly price is likely one of them. If Amazon wants to buy a department store for any reason, this is the time for it to pull the trigger.
But on the other hand, this entire scenario is still largely hypothetical. It’s never a good idea to invest based on acquisition rumors. But the rumors do highlight just how appealing JC Penney likely looks to anyone looking to gobble up some retail space.
Based on JC Penney’s rhetoric when it filed Chapter 11, it didn’t appear that the company was up for sale. Still, it would be hard to imagine the firm making a comeback at this point, especially in the wake of the coronavirus pandemic. There’s no guarantee people will return to shopping in-person as much as before the pandemic, when brick-and-mortar stores were already struggling.
As a result, Amazon may not expand its brick-and-mortar footprint.
Amazon Will Win Either Way
If the rumors prove to be true, and Amazon does decide to scoop up the bankrupt retailer, the firm has plenty of options. With Facebook’s (NASDAQ:FB) “Shops” threatening to take a bite out of Amazon’s massive e-commerce market share, the firm is likely looking for ways to differentiate itself from Facebook.
While traditional brick-and-mortar retailers have struggled to transition to an online model, Amazon would be doing it the other way around.But enticing customers into stores wouldn’t be as difficult if the firm was using the locations to give products to online shoppers.
Laura Hoy has a finance degree from Duquesne University and has been writing about financial markets for the past eight years. Her work can be seen in a variety of publications including InvestorPlace, Benzinga, Yahoo Finance and CCN. As of this writing, she did not hold a position in any of the aforementioned securities.