JC Penney and The Bon-Ton Stores Inc. (NYSE: BONT) are proving that department stores are doomed. Bon-Ton stock was trading at 27¢ a share on 27 November 2017 and 46¢ a share on 29 November 2017. JC Penney Company (NYSE: JCP) shares were trading at $3.24 on November 27 and $3.66 a share on 29 November 2017.
What’s truly disturbing is that the two department store operators might be overpriced at those horrific share prices. The latest financial numbers, appropriately dated October 31 or Halloween Day, indicate investors are probably paying too much for Bon-Ton and Penney at those prices.
Bon-Ton; which owns the Younkers and Boston Store brands, reported a loss of -$90.68 million, a “profit margin” of -7.98%, an earnings per share (EPS) ratio of -4.43, a “free-cash-flow” of -$186.23 million, and a loss of -$20.46 million from cash from operations on 31 October. To add insult to injury there was $7.268 million in cash and short-term investments on Halloween Day and a market capitalization of $9.527 million on 29 November 2017.
Penney’s reported a loss of -$178 million, a “profit margin” of -4.56%, an EPS ratio of -.5668, a “free cash flow” of -$334 million, and $552 million in cash from operations on October 31, 2017. The “value” at Penney’s consisted of $185 million in cash and short-term investments and a market capitalization of $1.133 billion on 29 November.
Department Stores can No Longer Make Money
The ycharts data for Bon-Ton and Penney’s proves one thing: traditional department stores can no longer make money. Bon-Ton generated no income but it reported revenues of $2.541 billion on October 31, 2017. Penney’s has no income, but it reported $12.44 billion in revenues on the same day.
Both department store operators are clearly in the death spiral because they can no longer take in enough money to make a profit after paying bills. The case of Penney’s is particularly disturbing because it still has $12.44 billion in revenues.
Unfortunately, such stores might remain in operation for a long-term because they are still making just enough money to get credit from banks, vendors, landlords, investors, and others. That creates a business where all the money that comes goes straight back out to the creditors.
Bon-Ton is in the Death Spiral
The death spiral reaches its logical conclusion when the revenues can longer cover the payment of the debts. That situation might be close to occurring at the Bon-Ton stores; which had $1.01 billion in long-term debt and $1.743 billion in total liabilities on October 31. The amount of Bon-Ton’s liabilities is now approaching its revenues of $2.541 billion.
What’s worse at Bon-Ton is that the company is borrowing more money to sustain its operations. It reported $26.69 million in cash from financing on 31 October 2017 up from $21.09 million in July, that means the company borrowed the money stay in operation.
Bon-Ton’s management has at least finally acknowledged the Death Spiral by announcing plans to close 40 stores next year, The Milwaukee Journal Sentinel reported. That would eliminate around one-sixth of Bon-Ton’s footprint but it is probably too late to help the company which has lost money for six years straight.
Incredibly, Bon-Ton CEO William Tracy claimed that the company is executing a “comprehensive turnaround plan” during the third quarter conference call. Tracy also talked of long-term plans to revitalize the company. One has to wonder what has this guy been smoking?
The only turnaround plan that makes sense at Bon-Ton is to call the bankruptcy lawyers, the auctioneers, and the real-estate agents. Then close the stores and sell off the assets which are worth around $1.587 billion. Bon-Ton should make that move because sooner or later a bankruptcy court will force it.
Revenues Demonstrate JC Penney and Bon-Ton Stores are Doomed
Such a plan is needed at Bon-Ton because its revenues are going nowhere but down. In October 2015, Bon-Ton reported $2.803 billion in revenues; that figure fell to $2.789 billion in January 2016, $2.758 billion in October 2016, $2.674 billion in January 2017, and $2.541 billion in October 2017.
What’s especially troubling is that those revenues fell over the course of two straight holiday seasons. All the extra expenses and effort for the Black Friday to New Year’s shopping frenzy produced no extra revenue at Bon-Ton for the last two years.
Nor was it just Bon-Ton, JC Penney reported revenues of $12.58 billion in October 2016 that fell to $12.55 billion in January 2017 and dropped to $12.44 billion in October 2017. Penney’s did report a slight revenue increase during the 2015 holidays; it reported $12.52 billion in revenues in October 2015 and $12.63 billion in January 2016.
The Department Store Ghost Dance
Holiday sales are not doing Penney’s much good, but it’s still investing in them. JC Penney announced plans to hire 2,500 additional associates for Christmas 2017 in the Houston Area alone, ABC 13 reported.
Penney’s has plans to spend more money to take in less revenue which will lead to greater losses. The rational thing to do would be to forgo the holiday hiring and make do with the resources it has. Then look for ways to cut operating expenses and concentrate investments in those areas with a chance for growth such as online retail or discounting.
Yet that is happening, because it violates department store traditions. Instead, management is conducting the traditional preparations in hopes that Amazon will magically vanish from the face of the earth, and the go old days of the 1980s will return.
The situation reminds me of the Ghost Dance ceremonies some Native American tribes held in the late 19th Century. The Ghost Dancers believed that if they held certain rituals all white people would vanish from the face of the Earth and the good old days would return.
The likely outcome of the department ghost dance will be a desperate rush to close stores and sell off assets in an attempt to stave off bankruptcy. That’s already happening at Bon-Ton; which has hired bankruptcy advisers, and it will soon be repeated at Penney’s.
Expect to see a dismal holiday season at department stores, probably highlighted by lots of news footage of bored associates playing with their phones on empty sales floors. That will be followed by a wave of store closings and at least bankruptcy probably at Bon-Ton.
Also, expect to see Penney’s and Bon-Ton vanish from both the mall and stock exchanges in the next year. After that expect to see the Department Ghost Dance repeated throughout the economy as the Retail Apocalypse switches into high gear in 2018. There’s a very good chance that 2018 will be the year the department stores died.