Market Mad House

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

The Junk Pile

JC Penney Dies as the Retail Apocalypse Grows

The great retail apocalypse is getting worse as JC Penney dies and plans to close 27 stores. Disturbingly, JC Penney (NYSE: JCP) is far from alone.

In fact, they cut 41,201 US retail jobs in January and February 2019, Challenger, Gray, & Christmas estimates. In contrast, America lost 21,484 retail jobs in January and February 2018. Therefore, the retail apocalypse is real, and it is getting worse.

For example, Lifeway Christian Bookstores is closing all 170 of its brick and mortar stores, NBC News reports. Meanwhile, JCPenney plans to close 27 stores in 18 states by July, Click On Detroit reports. In addition, JC Penney plans to stop selling furniture and appliances to get enough money to cover loan payments.

The Slow Agonizing Death of JC Penney

The retail apocalypse is a slow, agonizing death rather than a quick demise, financial data indicates.

Strangely, large retailers like JC Penney and Sears take a long time to die, slowly dragging out the misery so every employee; and investor, can share it. For instance, JC Penney had a share price of $1.46 and a market capitalization of $465.06 million on April 5, 2019.

In contrast, Amazon (NASDAQ: AMZN) had a market cap of $902.81 billion and Kohl’s (NYSE: KSS) had a market capitalization of $11.57 billion on the same day. Hence, JC Penney is dying because it has no money.

How JC Penney will Die

However, JC Penney will operate around 837 stores after the closings. To explain, JC Penney survives because it makes just money to cover its operations or borrow against its assets but generates no real profit.

Hence, management can keep the chain alive for a long time by slowly and strategically closing stores and trimming operations. Unfortunately, JC Penney will reach a point where its operations are unsustainable leading to collapse.

Specifically, JC Penney’s footprint will get so small it cannot generate enough cash to cover loan payments. Thus JC Penney will enter the infamous retail death spiral and die once and for all.

Zombies of the Retail Apocalypse

Thus we can safely describe JC Penney as a zombie of the retail apocalypse. Conversely, JC Penney is a zombie that makes money.

For instance, JCPenney reports a gross profit of $1.267 billion, revenues of $3.786 billion, an operating income of $127 million, and a net income of $75 million for 1st Quarter 2019. In addition, JCPenney records a $670 million cash flow and a free cash flow of $599 million for 1st Quarter 2019.

JC Penney makes just enough money to stay in operation. For instance, the department store had $333 million in cash and equivalents on 2 February 2019 In addition, JC Penney had $7.721 billion in assets it could borrow against on the same day.

How Cheap Corporate Debt fuels the Retail Apocalypse 

In an age of cheap corporate debt that is all JC Penney needs to survive. JC Penney need not make that much money because it can borrow, and borrow, and borrow.

Notably, any retailer; even a basket case like Sears, has no problem getting finance in today’s market. In October 2018, creditors were offering Sears loans in the hallway outside the bankruptcy courtroom where a judge was about to liquidate the company, The Chicago Tribune reports.

Retailers like JC Penney and Sears can get lots of financing because they have plenty of real estate to borrow against. Moreover, a lot of that real estate is in prime locations that growing retailers like Whole Foods and the TJX Companies (NYSE: TJX) will pay for.

Thus, the retailers can always close stores and sell locations to pay loans. Consequently, predatory lenders will offer dying retailers like JC Penney more and more debt.

Can JC Penney Survive the Retail Apocalypse?

Under these circumstances, JC Penney has a new plan to survive the brick and mortar apocalypse. The department store will try to imitate TJX by focusing on sales of women’s clothes and home goods.

In addition, JC Penney is deep discounting items like handbags to clear the shelves. Thus, JC Penney is acting more and more like TJX which makes money by deep discounting fashion and apparel.

Notably, the TJX Companies (NYSE: TJX) had a market cap of $65.75 billion and a stock price of $54.13 on 5 April 2019. In addition, TJX records revenues of $38.97 billion and a net income of $3.097 billion for 1st Quarter 2019.

JC Penney Lives just barely

However, it is not clear if JC Penney has the expertise to profitably deep discount; or the resources to provide the inventory a deep discounter needs. My suspicion is JC Penney cannot compete directly with deep discounters like Amazon (NASDAQ: AMZN) and TJX.

Instead, JC Penney will stumble on for a few more years before collapsing completely. When that occurs the only question remaining at JC Penney will be can they find enough buyers or renters to fill over 800 empty stores.

So yes, the apocalypse of retail is real, and it is claiming another legend of American retail JC Penney (NYSE: JCP). Under those circumstances, investors need to stay far away from JC Penney because its stock is junk.

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