The 2018-2019 Holiday Season could kill two of the most historic names in American retail, Sears (OTMKT: SHLDQ) and JC Penney (JCP).
Tellingly, JC Penney Co (NYSE: JCP) shares were trading at $1.27 on 13 November 2018. Thus, Penney’s could soon join Sears Holdings in bankruptcy.
Like Sears, Penney’s is in a terminal decline. For instance, Penney’s revenues shrank by 7.79% during 3rd Quarter 2018. Moreover, Penney’s reported an operating loss of -$36 million and a net loss of -$101 million for 3rd Quarter 2018.
Here’s Why JC Penney (JCP) will Declare Bankruptcy Next Year
Therefore, Penney’s net loss almost equaled its 3rd Quarter free cash flow of $104 million. Conversely, JC Penney (JCP) recorded an operating cash flow of $219 million and a gross profit of $998 million for 3rd Quarter.
For the record, ycharts reports Sears Holdings Corp had a Market Capitalization of $35.97 million and a stock price of 33.7¢ on 13 November 2018. Additionally, Sears recorded a -$1.308 billion net loss and a “profit margin” of -15.96% on 31 July 2018.
Conversely Sears’ 3rd Quarter revenues of $14.11 billion were larger than JCP’s 3rd Quarter revenues of $12.34 billion recorded on 31 July 2018. However, JC Penney recorded a gross profit margin of 35.28% on 31 July 2018.
Based on these numbers, I think JC Penney (JCP) will declare bankruptcy in 2019. I expect the Penney’s bankruptcy in February or March but company could hold out until July.
Dollar General’s Revenues are double those of JC Penney (JCP)
In addition, Penney’s 3rd Quarter revenue of $2.829 billion is less than half of Dollar General’s (NYSE: DG) revenue of $6.443 billion. To add insult to injury, Mr. Market gave Dollar General a stock value of $117.53 on 8 November 2018.
Hence, a bottom-feeding dollar store is thriving while Sears and JC Penney’s are dying before our eyes. The world of American retail is truly upside down.
Traditional department stores are struggling to survive while dollar stores see their income growing. An obvious conclusion is that middle class retailers like JC Penney can no longer make it in America.
Is JC Penney (JCP) in the Death Spiral?
The dreaded retail death spiral could be at close at JC Penney (JCP). Penney’s is close to the death spiral because it has little cash.
The death spiral occurs when a retailer lacks the cash to buy merchandise. The spiral usually occurs when a brand’s sales cannot generate enough cash to sustain its operations.
Penney’s recorded just $182 million in cash and equivalents on August 4, 2018. Thus, Penney’s has almost no money in the bank when its revenues are falling.
In addition, Penney’s had $4.217 billion in total debts on 4 August 2018. Disturbingly, Penney’s debt exceeds the value of its assets. Stockrow calculates Penney’s had $3.227 billion in assets in assets on 4 August 2018.
Why Penney’s will close Large Numbers of Stores in 2019
Therefore, JC Penney (JCP) could have no cash and no way to borrow money because its debt exceeds the assets. Under those circumstances, I surmise Penney’s cannot afford to add stock and staff or the holidays.
An obvious solution will be to close stores. Penney’s closed 140 stores in 2017 and eight in 2018. Therefore, expect a wave of store closings at Penney’s during or right after the holidays.
Notably, Penney’s operates 860 stores. Many of those locations will interest retailers like TJX (NYSE: TJX), Walmart (NYSE: WMT) Kroger (NYSE: KR), and Amazon .
Will TJX Buy JC Penney’s?
For example, TJX operates large departments under the TJ Maxx and Marshalls brands. TJX could convert many JC Penney locations into TJ Maxx or Marshalls stores.
A Black Swan event to watch for is TJX buying all or part of Penney’s. Penney’s is an attractive acquisition target because it is cheap. For instance Penney’s had a Market Capitalization of $403.07 million on 13 November 2018. Thus, TJX could buy Penney’s to loot it.
Additionally, TJX has the cash to buy Penney’s ycharts reports TJX had $2.4 billion cash and short-term investments on 31 July 2018. Furthermore, TJX could raise a lot of extra cash by selling off Penney’s real estate.
Speculators should pay attention to Penney’s because an acquirer could pay more for its stock. Moreover, an advantage Penney’s (JCP) has over Sears is that there is no hedge-fund billionaire in control the stock. Sears shares became worthless Eddie Lampert bought them all up. Under those circumstances, JCP is an interesting speculative play.
How JCP Penney (JCP) will die
Those who want to see a prevue of JC Penney’s death can take a look at the Bon-Ton Stores.
Bon-Ton was a department store operator that went through bankruptcy and liquidation in 2018. Bon-Ton operated several department brands including Herbergers, Younkers, Carson’s Elder-Beeman, the Boston Store, and Bergners.
Bon-Ton limped along for years despite anemic sales. Disturbingly, Bon-Ton kept up the façade of running a profitable department store for a long time. For example, Bon-Ton hired additional associates for Christmas 2017, a few months before total collapse.
Markedly, JC Penney is hiring temporary associates for the 2018 Christmas season. Thus, Penney’s will pay some lucky people to stand around and play with their phones in empty stores. Hopefully the temporary associates’ paychecks will clear before Penney’s declares bankruptcy.
How the Ghost of JC Penney will haunt the Internet
Eventually, Bon-Ton went out of business completely. However, there is a new “The Bon-Ton” an online retailer that bills itself as “the modern department store.”
Hence, a likely scenario is that JC Penney’s (NYSE: JCP) physical operations will die but an online presence will remain. Like a ghost, JC Penney’s will survive on the internet for years or even decades.
A likely scenario is that an online discounter like Walmart.com, Overstock.com (NASDAQ: OTSK); or TJX, will buy the names of popular dead department stores. That discounter will use the websites of the dead stores to peddle off brand, overstock, outdated, and other discount merchandise.
No matter what happens JC Penney faces a grisly death soon. That death is likely to begin in January 2018. Speculators should get ready because they might make money from JC Penney’s death.