Market Mad House

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

The Death Spiral

See the Retail Apocalypse at JC Penney

Those who want to see what the retail apocalypse looks like need to visit JC Penney (NYSE: JCP).

The department store legend’s financial numbers in particular, demonstrate the reality of the brick and mortar apocalypse. JC Penney posted an operating loss of -$93 million, a net loss of -$154 million and a revenue growth rate of -4.34% on 4 May 2019.

Furthermore, JC Penney’s quarterly revenues fell from $3.786 billion on 2 February 2019 to $2.555 billion on 4 2019. Meanwhile, the quarterly gross profit dropped from $1.267 billion to $925 million.

Thus JC Penney is losing money on its operations with a $1.63 billion cost of revenue. Consequently, JC Penney is burning through a lot of cash. Notably, Penney’s posted a negative operating cash flow of -$205 million, capital expenditures of -$71 million, an investing cash flow of -$63 million, and a free cash flow of -$276 million.

How is JC Penney staying in Business?

Under these circumstances, investors will ask how is JC Penney staying business? The obvious answer is JC Penney is borrowing money to stay in business.

In fact, JC Penney reported total debts of $5.087 billion on May 4, 2019. Thus, Penney’s debt is worth more than half of its total assets which were $8.342 billion on the day same.

Moreover, JC Penney’s debt was over 10 times the size of its July 2, 2019; market capitalization of $345.33 million. Given these figures, I cannot see how JC Penney can pay off those debts.

Instead, JC Penney will borrow more money to pay off the debts by mortgaging its stores. Then, Penney’s will try to raise money for debt payments by closing stores. Not surprisingly, Penney’s is closing 27 of its 864 stores, USA Today reports.

Is JC Penney’s in the Department Store Death Spiral?

I predict many more closings at Penney’s because the retailer is in the death spiral.

I think Penney’s is in the death spiral because it had only $171 million in cash and equivalents but $1.945 billion in liabilities and $5.087 billion in debt on 4 May 2019. Frankly, I cannot see Penney’s will pay off those debts without selling off a lot of assets.

The department death spiral usually works like this. First, the retailer borrows money to cover its operations because sales are falling. Second, the retailer closes or selling locations to pay off the loans. Third, the retailer collapses into bankruptcy because it lacks the resources to pay off all that debt.

Meanwhile, the retailer’s stock collapses to tiny prices. For example, $1.09 a share for JC Penney stock on 2 July 2019.

Notably, we have already seen this process at Sears which is struggling to survive in bankruptcy. At Sears that led to a vicious cycle of selling off real estate and other assets to cover the ever-growing debts.

Penney’s is in a little better shape than Sears because a hedge fund has not pillaged it. Notably, hedge fund operator Eddie Lampert thoroughly looted Sears. 

The Retail Apoclaypse the Worst is Yet to Come

Even if it avoids the death spiral, Penney’s future is bleak because the retail apocalypse will get far worse.

UBS predicts 75,000 brick and mortar stores will close in the United States by 2026, Business Insider reports. Disturbingly, UBS analysts expect 17% of American clothing stores, or 21,000 brick and mortar shops will be gone in seven years.

Those shops will close because UBS expects ecommerce to account for 25% of US retail sales by 2026. Notably, UBS claims, Amazon (NASDAQ: AMZN) added the equivalent of 7,700 stores or $35 billion retail sales in 2018.

JC Penney will be hard hit because almost everything it sells is easy to market online. For example, clothing, shoes, jewelry, small appliances and home furnishings. Notably, America’s fastest growing e-tailer Wayfair (NYSE: W) specializes in home furnishings.

A related problem for Penney’s is that shrinking brick and mortar footprints make malls, its prime location unprofitable. In particular, less stores means less foot traffic and less business. Fewer retailers means less rent which gives mall operators another reason to shutter the doors.

Retail Extinction is Heating Up 

Disturbingly, the mass extinction of retailers can take place quickly and unexpectedly. Business Retailer claims, retailers were planning over 1,100 store closures on 7 March 2019 alone.

In detail, Abercrombie & Fitch announced 40 closings, Chico’s announced 150 store closings, Dollar Tree (NASDAQ: DLTR) announced plans to close Family Dollar stores and convert 200 Family Dollar stores into Dollar Tree locations. Plus, Charlotte Russe announced plans to liquidate its entire operation of 490 stores.

Finally, on 17 April 2019 Business Insider estimated that 5,994 stores had closed in the US in the 1st Quarter of 2019. Consequently, Business Insider claims more stores closed in the 1st Quarter of 2019 than in all of 2018.

It it is accurate, Business Insider’s estimate verifies UBS’s thesis that Amazon killed 7,700 brick and mortar stores in 2019. Since Amazon’s revenues grew from $177.866 billion on 31 December 2017 to $232.837 billion on 31 December 2018, I think UBS’s assertion is correct.

Therefore, it is a good time for all investors to stay away from JC Penney stock because JCP is worthless. Penney’s is now the poster child for the retail apocalypse.