Market Mad House

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

The Death Spiral

Department Stores die at JC Penney (NYSE: JCP)

Coronavirus could be fatal to department store legend JC Penney (NYSE: JCP). Penney’s is feuding with its suppliers and dodging bankruptcy rumors.

The only way JC Penney can keep Sephora in its stores is to sue the makeup company, CNBC reports. Sephora is trying to leave closed JC Penney stores.

JCP has asked a court for a restraining order to keep Sephora in its store. Penney’s management fears Sephora’s exit will cost it business. CNBC reports Sephora’s online sales are booming during the pandemic.

Will JC Penney Go Bankrupt?

JC Penney (NYSE: JCP) management is reorganizing and considering a Chapter 11 bankruptcy, Business Insider speculates. To elaborate, a Chapter 11 Bankruptcy gives a business the opportunity to restructure its debts while staying in operation.

Penney’s has been in “negotiations with lenders” since mid-2019, Business Insider claims. I think that statement translates to: “we cannot pay our debts so we’re begging for better terms.”

Penney’s needs Chapter 11 because coronavirus closed its stores. In addition, JC Penney stock traded at 21₵ a share on 6 May 2020. JC Penney had a Market Capitalization of $68.369 million on the same day.

JC Penney is in Big Trouble

The JC Penney Co (NYSE: JCP) was in big trouble long before coronavirus hit.

Stockrow reports Penney’s suffered five straight quarters of revenue shrinkage. In detail, Penney’s reported a -8.44% revenue shrinkage rate on 31 January 2019, a -4.34% revenue shrinkage rate on 30 April 2019,  -7.42% in  revenue shrinkage on 31 July 2019, a -8.53% revenue shrinkage rate on Halloween Day 2019, and -7.74% in revenue shrinkage on 31 January 2020.

Therefore, Penney’s sales, foot traffic, and revenues were collapsing before coronavirus. As a result, Penney’s lacks the money and resources to survive.

JC Penney’s Struggle to Survive

For example, JC Penney reported $102 million in operating income and a common net income of $27 million for the quarter ending on 31 January 2020.

In contrast, Penney’s reported a quarterly gross profit of $1.236 billion and $3.493 billion in quarterly revenues on 31 January 2020. Thus, Penney’s can make some money.

Notably, JC Penney reported a quarterly operating cash flow of $734 million and an ending cash flow of $229 million on 31 January 2020. Moreover, Penney’s had $386 million in cash and short-term investments on 31 January 2020.

Unfortunately, Penney’s had $7.16 billion in total liabilities and $4.682 billion in long-term debt on 31 January 2020. Therefore, I think JC Penney’s was incapable of repaying its’ debts and bills before coronavirus.

What Value Does Penney’s Have?

JC Penney (NYSE: JCP) operated 846 department stores in 2019, Statista estimates.

The value of those stores is small because Penney’s biggest competitor is Amazon (NASDAQ: AMZN). Amazon reported $55.021 billion in cash and short-term investments on 31 December 2019.

Moreover, Amazon reported $87.437 billion in quarterly revenues and a quarterly gross profit of $33.46 billion on 31 December 2019. Therefore, Penney’s lacks the resources to compete with Amazon.

I predict coronavirus will kill Penney’s because many of its customers will never return. To explain, those customers are experiencing Amazon’s convenience and low prices first hand. In addition, fear of COVID-19 gives those customers an excuse not to shop at JC Penney or the mall.

I think Penney’s will struggle to attract customers and make money if its stores reopen. A strong possibility is that the stores will reopen for a short while, then collapse.

Can JC Penney’s Pay its Rent?

Another problem Penney’s faces is feuds with landlords. Penney’s claims it paid its April rent, Bloomberg reports. However, Bloomberg also reports Penney did not pay the interest on its debt on 15 April 2020.

Thus Penney’s similar to the working family that pays the rent but not the credit card bill. To explain, Penney’s could have stores but no money or credit to cover its expenses.

US Department Store sales could fall by 70% in 2020

Bloomberg Intelligence estimates Penney’s sales could decline by up to 71% this year.

Disturbingly, Bloomberg’s best-case scenario for JC Penney in 2020 is a 35% drop in sales. I do not think Penney’s can survive with a 35% to 71% collapse in sales.

Penney’s is not alone its misery. Frighteningly, Bloomberg claims Macy’s (NYSE: M), Nordstrom (NYSE: JWN), Dillard’s Inc. (NYSE: DDS), and Kohl’s (NYSE: KSS) could suffer similar collapses in sales. For instance, Bloomberg Intelligence’s 2020 best case example for Macy’s is a 30% loss, and the worst-case scenario is 63%.

The End of Department Stores

Furthermore, Nordstrom’s 2020 best-case scenario is a 26% sales drop, while the worst-case scenario is a 56% sales collapse. In comparison Bloomberg’s worst case 2020 Dillard’s sales forecast is 70% and its best case sales forecast is 34%.

Comparatively, Bloomberg predicts Macy’s 2020 sales could drop by 63% in a best-case scenario and 30% in a worst case scenario. Finally, Bloomberg’s worst case 2020 forecast for Kohl’s was 65% and its best-case scenario for Kohl’s is 30%.

Therefore, Bloomberg forecasts that four major US department store chains could lose over two-thirds of their sales in 2020. Plus, Bloomberg’s best-case scenario is that four major US department store chains, Dillard’s, Kohl’s, Penney’s, and Macy’s could lose one third of their sales.

Department Stores are Doomed

If Bloomberg’s predictions are true, the American department store business is in collapse. Thus, there could be no department stores for the 2020 holiday season.

Under those circumstances, I think JC Penney (NYSE: JCP) has no value as a retailer or a stock. Hence, I think investors need to stay far away from Penney’s and the other department stocks.

In my opinion, it will take a miracle for department stores such as JC Penney, Kohl’s, Macy’s, and Dillard’s survive 2020 and coronavirus. Smart investors will avoid those stocks because they have no value.