Market Mad House

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

The Death Spiral

JC Penney: Is It a Dying Brand in a Dying Industry?

JC Penney Co. (NYSE: JCP) has become the zombie of retail; it appears to be dead or dying, but it keeps right on walking. Few brands have been hit harder by the forces decimating American retail than Penney’s, yet the brand has somehow survived.

Like Sears Holdings (NASDAQ: SHLD), it stays alive despite incredible losses, a terrible reputation, and customers that avoid the retailer like the plague. In fact, it is not clear what is sustaining JC Penney beyond sheer inertia. Yet the chain keeps right on going despite closing stores, miserable foot traffic, and collapsing revenues.

Incredibly, JC Penney even had some respectable revenue growth over 2015. On January 21, 2015, JC Penney reported a TTM revenue of $12.15 billion that grew to $12.62 billion a year later. This hardly means Penney’s has turned around, because the revenue numbers are still below that of January 2013 ($12.98 billion) and far below that of January 2012 ($17.26 billion).


Revenue Recovery Not Helping Penney’s

The problem at Penney’s is that the revenue recovery is not helping Penney’s elsewhere. On January 31, 2015, the department store operator reported these dismal numbers:

  • A diluted earnings per share figure of -1.88
  • A net income of -$573 million
  • A profit margin of -3.28%
  • $440 million in cash from operations.

Despite that, Penney’s was still able to stay afloat; it had $900 million in cash and short-term investments. It looks as if Penney’s is being sustained by the momentum generated from such actions as closing stores.

Appliances Will Not Save Penney’s

The modest revenue increase shows the company is capable of growth. Unfortunately, that growth could be threatened by the arrogance of management; instead of concentrating on its struggling core, this retailer is even planning to enter a new field: appliances. The Marketplace blog reported that the company is planning to sell major appliances such as washing machines and refrigerators.

That idea does not seem very bright, because appliance sales have not helped Sears nor its ugly stepchild, Sears Hometown & Outlet (NASDAQ: SHOS), both of which are now retail basket cases. News stories indicate that Sears could be planning to close between 50 and 100 stores over the next few months because it cannot compete with more aggressive retailers such as Best Buy (NYSE: BBY) and Lowes (NYSE: LOW).


It is hard to see how offering appliances will help Penney’s beyond burning up more cash and hastening its demise. A better strategy would be to concentrate on the company’s core competencies, such as clothing, and shoring up its brand.

Penney’s brand has been effectively destroyed, and no serious effort has been made to save it. Adding new merchandise far outside the company’s traditional lines will only dilute the brand further. A big problem JC Penney would face by adding appliances would be large amounts of expensive items on consignment. It could be faced with stores full of goods that will not move, a situation that killed earlier retailers like Ward’s, Circuit City and Linens n’ Things.

Can Penney’s Survive?
It is hard to see how Penney’s can survive as a traditional department store chain. It has lost its middle-class customers to aggressive discounters such as Target (NYSE: TGT), Amazon (NASADAQ: AMZN) and Costco (NASDAQ: COST) and younger shoppers to upstart chains such as H&M.

At the same time, income inequality and wage stagnation are decimating the buying power of Penney’s middle-class customer base. These trends drive customers away from the mall and towards the discounters.

The only hope for Penney’s would be to reinvent itself as something else, such as an online retailer. The prospects of that seem limited because of the weakness of Penney’s brand. The sorry truth is that JC Penney’s days seem numbered. One has to wonder how long it can go on, particularly with losses of -$573 million in a quarter.


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