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Is It Worth Saving Penney’s?

Monday - 8/19/2013, 7:01am  ET

The last time J.C. Penney got this much newspaper space was when the struggling retailer spent heavily on a flood of advertisements to lure customers into stores. Presently, the beleaguered chain is taking up print coverage for very different reasons. J.C. Penney is making headlines for its fight for survival.

Last year, the limping retailer lost $1 billion and sales slumped 25%. Year to date, it hasn’t shown much improvement. Shares have shed 35% since January and continue to wane, and its prospects look iffy at best. Suppliers to the retailer estimate sales at stores opened at least a year (a key measure of a retailer’s health) dropped by more than 10% during May and July. Moreover, its cash on hand is dwindling. Particularly troubling is Penney’s freshly-renovated home department section.

Under construction during the first quarter of 2013, hopes were high that the areas would draw big crowds when they debuted in June. However, suppliers report sales in critical categories in the revamped home department are running 40% to 50% below its internal plan.

The big concern is that prices on a bevy of its home good items, such as $115 coffee makers, $3,000 sofas and $100 window treatments, are way too pricey for its typical clientele. Indeed, the Wall Street Journal reports J.C. Penney offered “more store-wide promotions with overall savings” than rivals in an attempt to appease customers. So why go upscale?

A highly competitive landscape

To be sure, J.C. Penney has some stiff competition from the likes of Macy’s and Kohl’s . Moreover, if customers are going to pay up for items, they are likely to shop elsewhere.

Macy’s has been embroiled in a battle with J.C. Penney over the coveted Martha Stewart line. Macy’s alleges it has an exclusive agreement with Ms. Stewart to carry her signature items. But a judge ruled otherwise.

Macy’s disappointed it shareholders when it reported second quarter earnings and gave a dismal outlook for the remainder of the year. The department store missed EPS expectations by $0.06. Revenue of $6.07 billion also fell short of the $6.26 billion analysts had forecasted. Macy's warned that shoppers, eager to spend at the start of the year, are now stretched.

Macy's, as well as other big retailers, have recently cast a dark cloud over what had been a healthy outlook for the retail sector. It seems as though positive economic data is not showing up in cash register drawers.

While Kohl's has fared a little better, beating second quarter earnings estimates by a penny, sales were down 2.7%. Simply put, traffic slowed and sales were uninspiring.

Although Kohl's didn't open any stores during the second quarter, it plans to open three new stores and remodel 30 more in the fall. Kohl's currently has 1,155 stores in 49 states, up from 1,134 stores a year ago. That is an encouraging sign amid a lackluster retail environment. For the third quarter, Kohl's expects earnings in the range of $0.83 to $0.92 per share and sales to grow a modest 1% to 3%.

The fight for a new CEO

Expectations are low for J.C. Penney, and they are growing more dim daily. It's not just the muted showing from fellow retailers who has cast a pall over the retailer; it is also the ongoing struggles in the company's board room. While it should be concentrating on improving performance and staging a true turnaround, the major focus has been on finding a new CEO and the very public fight with board member and hedge fund titan Bill Ackman.

Ackman was instrumental in bringing in former Apple executive Ron Johnson to run the ailing retailer. In attempts to gussy up the chain, Johnson did away with coupons and several private label lines, much to the chagrin of customers. Sales slumped and Johnson was eventually dismissed. Ackman also packed it in when he was criticized for being a distraction. 

In a kind of "take that" move, Ackman, J.C. Penney's largest shareholder, filed with the SEC to sell his hedge fund's 18% stake. Such a sizable sale will certainly pressure the stock, which is now trading close to a 52-week low.

Foolish final thoughts

While the hunt for a CEO is underway, a new chief may not be able to rescue J.C. Penney. Furthermore, a leader will take over at a time when the crucial back to school shopping season, second only to the year-end holidays, got off to a seriously slow start. Tepid sales also weigh on the company as it had to spend to stock up for the holidays.

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