Market Mad House

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

The Junk Pile

The Retail Zombie Apocalypse at JC Penney

The retail apocalypse is fast becoming a zombie apocalypse in many malls. The zombies are retail brands like JC Penney (NYE: JCP) which are basically dead but still shuffling around.

Zombie stores remain in operation with inventories and large staffs because management can borrow money at low rates. Unfortunately, the chains cannot make enough money to pay off the debts they accumulate. This is why the Bon Ton Stores was able to hire thousands of associates in December 2017, just two months before bankruptcy and liquidation in February 2018.

Penney’s is trying to stave off death and make up for lost revenues with the magic talisman known as celebrity. The company is now paying such icons as Shaquille O’Neal and Lionel Richie to promote its department stores, Ad Age reported. That is good for Shaq and Lionel but it probably will not help JC Penney or its stockholders.

Will the Shaq Save JC Penney?

Penney ads with the Shaq will run during NBA basketball games on the TNT network. The hope is that the Shaq will get overweight middle-men to get off the couch and shop at JC Penney. A more likely result is that such men will shop for plus size clothes on Amazon (NASDAQ: AMZN), so they don’t have to interrupt their NBA viewing.

A better way for Penney to attract such men would be by adding a food court with eateries like Shake Shack (NYSE: SHAK) and Qboda to its stores. That might get some men to come to JC Penney, although there’s no guarantee they would actually shop there.

One group that will not be helped by Shaq is JC Penney stockholders. Shares of JC Penney were trading at $2.74, less than $3 on May 8, 2018. Hopefully, Shaq will not invest any of the money he makes from Penney’s in its stock.

Is JC Penney Making Money?

Oddly, JC Penney is making some money; it reported an operating income of $247 million and a net income of $254 million for 1st Quarter 2018. The net income was a huge improvement over $192 million in 1st Quarter 2017, and -$128 million in 4th Quarter 2017.

The department store operator also reported a gross profit of $1.355 billion, a free cash flow of $529 million, and an operating cash flow of $637 million for 1st Quarter 2019. That indicates JC Penney can make some money, and survive, especially in the holiday season.

Revenues at JC Penney have grown, they were $4.031 billion in 1st Quarter 2018, up from $2.807 billion in 4th Quarter 2017, and $2.962 billion in 1st Quarter 2017. It looks like the company is doing a better job of merchandising and is capable of making some money in today’s retail environment.

Unfortunately, the company may lack the resources for long-term survival, it had just $458 million in cash and short-term investments and total assets of $8.413 billion on February 3, 2018. That’s just enough to cover the cost of borrowing, but not enough to finance the kind of restructuring of the company needed for long-term survival.

Will JC Penney Survive?

My take is that JC Penney will survive for a few years if the economy stays good. If there is any sort of economic downturn total collapse of JC Penney is likely.

A sudden collapse of JC Penney like the one at the Bon Ton stores is likely because of the low stock price, and limited income. One cause of the collapse would be an inability to cover the cost of borrowing.

A smart move at Penney’s this year would be for the company to forgo hiring a lot of extra associates for the holiday. Instead, it should that money in improving customer service and expanding online operations.

Another good strategy will be to invest in more deep-discounting. Discount-department store operator The TJX Companies Inc. (NYSE: TJX), reported revenues of $10.960 billion, an operating income of $1.116 billion, and $877.28 million for 1st Quarter 2018.

Emulating the bargain-basement tactics at TJX Brands like Marshall’s and TJ Maxx would be a smart move for Penney’s. So would employing next-generation discount marketing stratagems such as flash sales in its stores.

Penney’s needs to change all its operations and fast, or it will join the ranks of retail zombies shuffling towards their doom. Investors should stay away from Penney’s because this company is heading for collapse, without a total realignment in operations.