Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

The Death Spiral

This is How a Department Store Dies, JC Penney

J.C. Penney (NYSE: JCP) has officially entered the retail dead zone. The iconic department store’s stock was trading at $3.535 a share on October 10, 2017.

Penney’s has lost $5.73 or more than 60% of its share value in less than a year. What’s truly embarrassing is that Penney’s shares are now worth less than Sears Holdings (NASDAQ: SHLD) stock which was trading at $6.77 on 10 October 2017. Although Penney’s market capitalization of $1.098 billion; still exceeded Sears’ market cap of $727.41 million on October 6, 2017.

This does not mean Sears is better than Penney’s. The difference between the two is that Penney’s does not have a dumb billionaire like Eddie Lampert using his money to pump up its’ stock value.

The low stock prices at Sears and Penney’s also explain why the Nordstrom family is trying to take their iconic store private. They don’t want to see Nordstrom (NYSE: JWN) shares joining Sears and Penney’s in the toilet.

Proof that Penney’s is dying

The latest financial report provides some proof that Penney’s is dying. It featured some pretty dismal numbers including:

  • A loss of -$117 million instead of an income on July 31, 2017.

  • “A profit margin” of -2.09% on July 31, 2017.


  • A free cash flow of $293 million on July 31, 2017.


  • A return on equity of -9.67%. Note that was before the big stock price drop in August so it is probably far worse right now.


Despite those terrible numbers and the horrendous stock price, there is some hope for J.C. Penney’s. Some of the numbers indicate that this brand might survive.

Some Hope that JC Penney’s Might Survive

Strangely enough, there is some hope that JC Penney is salvageable. The latest earnings report indicates it is in far better shape than basket cases like Sears.

Penney’s revenues actually rose slightly in third quarter 2017. Penney’s reported revenues of $12.44 billion in April 2017 and $12.49 billion in July. That means the brand is capable of attracting new sales.

More importantly, Penney’s revenues have been surprisingly stable for some time. Back in July 2015 revenues were $12.39 billion, they rose to $12.62 billion in July 2016, and fell to $12.49 billion in July 2017. This might indicate that Penney’s is doing just enough business needed to survive.

A problem here is that inflation might be responsible for the revenue increase. If it is there is no revenue growth, but no real decline either.

Is JC Penney Making Money?

Penney’s is not making money now but it is generating some cash. The company reported $598 million in cash from operations and $314 million in cash from operations on 31 July 2017. More importantly, Penney’s reported a negative cash-from-financing figure of -$487 million.

That means Penney’s is generating just enough cash to survive and not borrowing money to finance its’ operations. Therefore it might be capable of staying in operation for a lot longer than you might think. Particularly if the management takes it private, closes unprofitable stores, and sells off assets.

Penney’s still has quite a bit of value in the form of $8.326 billion in assets on July 31, 2017, and an enterprise value of $5.082 billion on 10 October 2017. This means it has the resources to survive as a private company.

How Long can Penney’s Survive?

The determining factor in Penney’s survival will be its’ management’s willingness to change. There are a few shifts in strategy and business plan that might keep Penney’s going for a long time.

A big; and unpopular, move would be not to hire that many additional employees for holiday season 2017. The money spent to hire, train, and pay those people might be worth because Penney’s revenues actually fell over the last holiday season. Penney’s reported revenues of $12.58 billion in October 2016 and $12.55 billion in January 2017.

That indicates Penney’s might face some losses during the 2017 holiday season if it follows the traditional strategy. A smart move would be to hold a holiday sale but not hire any additional employees for it.

Can Amazon Help Penney’s Survive

“When the going gets weird, the weird turn pro.” – Hunter S. Thompson

Other changes include closing more stores, entering into partnerships with online retailers like Amazon (NASDAQ: AMZN), (NASDAQ: OTSK) or (NYSE: WMT), closing stores, cutting the size of stores, cutting staff, eliminating print and broadcast advertising, and expanding online and delivery options. A really smart move for Penney’s would be to offer some sort of same day delivery through Deliv, Uber, Lyft, or Google Express.

An interesting move would be to join Kohl’s (NYSE: KSS) and offer Amazon pickups and returns in its stores. A smarter move would be to start selling JC Penney merchandise and appliances through Amazon, Walmart, Overstock, or Alibaba (NYSE: BABA). A problem Penney’s faces is that customers go to other sites such as Amazon rather than its site, so why not join their ecosystems?

Right now JC Penney’s needs some extra revenues and online sales might be a cheap way to get them. It would also be a great way to tap Amazon or Walmart’s marketing efforts. Offering a free in-store pickup option for online merchandise ordered through other sites can attract some additional foot traffic.

Could TJX Save Penney’s

A final option at Penney’s is to start offering more unusual discounts like those seen at the TJX Companies (NYSE: TJX) stores. TJX has survived by turning its stores like Marshalls and TJX Maxx into giant bargain basements and offering lots of weird off the wall buys.

An obvious development here would be for TJX to buy JC Penney’s. TJX certainly has the resources to acquire Penney’s it reported $2.952 billion in cash and short-term investments and $3.521 billion in cash from operations on July 31, 2017.

Penney’s would be cheap because of the $1.098 billion market cap, but acquiring it would give TJX an additional 1,085 locations. Obviously, Penney’s shoppers might like that but being purchased by TJX would save the company from Sears’ fate.

My take is that Penney’s will survive if its management takes Hunter S. Thompson’s advice and get weird fast. Much like Nordstrom is doing with its bizarre Local experiment. If it keeps following business as usual, Penney’s will follow Sears and the Bon Ton Stores (NYSE: BONT) into the retail graveyard.