Market Mad House

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

The Death Spiral

Treading Water is good; JC Penney demonstrates how Awful Retail is

JC Penney (NYSE: JCP) is demonstrating how awful things are for brick and mortar retail with its revenues. Tiny revenue gains that amount to treading water are now a good development for the historic department store operator.

Like Best Buy (NYSE: BBY) JC Penney seems to be stuck in a rut; unable to grow, but avoiding the kind of epic collapse seen at Sears (NASDAQ: SHLD) and Macy’s (NYSE: M). Penney’s reported revenues of $12.62 billion on July 31, 2016, a slight improvement from July 2015 when revenues were $12.39 billion but not much more than July 2014; when Penney’s had $12.16 billion in revenues, or July 2013 when revenues were $12.11 billion.

Amazon is 10 Times Bigger Than Penney’s

Penney’s revenues are growing at a glacial pace; it added $510 million in revenue in just three years. That sounds good until you compare it with Amazon (NASDAQ: AMZN) which added $53.79 billion in revenue between June 2013 and June 2016. For record Amazon reported $66.85 billion in revenues in June 2013 and $120.64 billion in June 2016.


That means Amazon’s revenues are now 10 times larger than Penney’s. What’s worse is that Amazon’s revenue growth during the first half of 2016 exceeded all of Penney’s revenues. Amazon’s revenue grew by $13.63 billion between December 2015 and June 2016; rising from $107.01 billion to $120.64 billion six months later.


These numbers indicate that there is a lot of growth in the retail sector but it’s all happening online. That’s really bad news for legacy retailers like Penney’s with their massive brick and mortar stores. The most they can hope for is very limited growth.

The Dark Side to Penney’s Growing Revenues

Things might be even bleaker for Penney’s than we realize because its’ so-called “growth” might be coming from the death of its competitors. When a Sears or Macy’s location shuts down, its customers simply shift to the last department store left in the Mall; which is often Penney’s.

Basically Penney’s is only attracting the older legacy customers that refuse to shop online; or at more downscale retailers like Costco Wholesale (NASDAQ: COST) or Walmart (NYSE: WMT). Macy’s revenues fell by $460 million during the first three months of 2016 prompting the chain to announce plans to close 100 stores. Sears’ revenues fell by $490 million during the same period.


This is terrible news for department store operators because it appears that their foot traffic is not growing. Instead it is simply shifting around from store to store. A related problem is that when there are fewer stores in the mall people have less reason to go there so overall foot traffic falls.

What is truly disturbing though is that the revenue falls at Sears and Macy’s are not being matched by the gains at Penney’s. That means the customer base is shrinking steadily and sometimes dramatically. It appears that a portion; perhaps a significant proportion, of customers are abandoning department stores completely.

Are Department Store Customers Dying Off?

A related and potentially fatal dilemma for department stores is that their customers tend to be older and more likely to die. The mortality rate for people between 60 and 64 years of age; likely department store shoppers, is 1,047 deaths per 100,000 according to Politico writer Daniel J. McGraw.

McGraw calculated that 2.75 million of the 61 million Americans who voted for Mitt Romney in the 2012 presidential election would die between 2012 and 2016. Apply that math to department store shoppers and you suddenly see one of the greatest challenges facing legacy retailers like Sears and Penney’s, their customer base is dying off.


These figures are grim news for Penney’s; because more than half of its revenue comes from customers that are 60 year old women, Bloomberg News reported. Where will the revenue come from when those ladies die off or get too old to shop?

What’s worse is that the revenue figures indicate Gen Xers and Millennials are not taking their place. Instead the younger shoppers are buying online or at other brick and mortar outlets.

Retailers Pick Each Other’s Bones

Now for the most dismal aspect to this whole tragedy; instead of copying Walmart and looking for creative strategies to attract new business, legacy retailers are literally feeding off the corpses of fallen competitors. CNBC reported that JC Penney is moving back into the appliance business as Sears collapses.

At the same time, Best Buy is expanding its sales of white goods (large appliances such as washing machines and refrigerators). The two retailers are trying to cash in on Sears’ collapse from the largest appliance retailer. Sears had 40% of the white goods market in the 1990s and 19.5% in 2015, according to CNBC.


Penney’s has become a retail vulture consuming the business and customers of a dying rival. Bloomberg News reports it even has a special direct-mail marketing operation that targets former Sears or Macy’s customers when those stores close. One has to wonder how long this retail cannibalism can be sustained. Where will Penney’s new customers come from when the last Sears or Macy’s locks its doors?

Nor does it seem to be a long term growth strategy. The only customers JC Penney’s will pick up will be those older appliance shoppers that don’t want to go to Lowe’s (NYSE: LOW) or Home Depot (NYSE: HD). When the millennials and Gen Xers go appliance shopping they head to the massive home improvement stores not to the mall. Once the older shoppers die off, so will Penney’s appliance sales.

Is Penney’s Making Money?

We can see that the future looks pretty bleak for JC Penney’s, but value investors will ask is the department store operating making money. Value buyers will be attracted to Penney’s by its bargain-basement stock price; $9.99 a share on September 8, 2016.

Sadly that price might be accurate because Penney’s is definitely not making money. On July 31, 2016, it delivered a dismal financial report that included these highlights:

  • A negative net income of -$332 million. What’s truly dismal about this is that Penney’s has not reported a positive income figure since October 2011. It is closing in on five straight years of losses.


  • A negative diluted earnings per share figure of -1.08


  • A negative profit margin of -1.92%.


  • A free cash flow of $65 million.


  • Assets of $9.166 billion


  • Cash and short-term investments of $429 million.


  • $7.969 billion in liabilities.


  • $4.725 billion in long term debt.


  • $416 billion in cash from operations.


So Penney’s is losing money but it might be a good buy because it is terribly underpriced right now. It had a market cap of $3.073 billion and an enterprise value of $7.37 billion on September 8, 2016. The problem as anybody can do the math will note is that the amount of Penney’s liabilities now exceeds its enterprise value.

All this indicates that the only thing of value at Penney’s might be its real estate. The only way this retailer will be able to survive is to close a lot of stores and liquidate a lot of real estate.

One has to wonder if some investor will buy Penney’s just to get her hands on the chain’s real estate then start selling it off. Disturbingly that might be the only way anybody will be able to make any money from JC Penney’s.