By JACK HOUGH
J.C. Penney (JCP)
Sales at longstanding J.C. Penney stores tumbled more than 20% during the first half of this year. That ranks among the worst collapses in retail over the past 50 years, Bernard Sosnick, an analyst with New York broker Gilford Securities, wrote last month in a note to clients.
The stock price, however, is higher than it was a year ago. It gained 6% on Aug. 10, the day J.C. Penney reported a bigger-than-expected loss and withdrew its earnings guidance for the year, prompting Moody's to lower its debt rating deeper into "junk" territory.
The stock has risen another 23% since then.
Investors seem enthusiastic over changes being made by chief executive Ron Johnson, poached from Apple last November. His plan involves turning J.C. Penney from a mass merchant into a specialty retailer, featuring more of its store brand and exclusive deals on other brands. Stores will consist of single-brand shops clustered around a "town square" meant to drum up traffic with complimentary services, including free haircuts for kids on Sundays this fall.
That vision fits neatly with what analysts say is separating winners from losers in retail (see "What's In Store for Store Stocks"). The losers, who sell the same goods as Amazon (AMZN)
There are three problems with J.C. Penney's turnaround, however. First, it is rowing into the current of slowing economic growth. The U.S. economy expanded at an annualized pace of just 1.7% last quarter, down from 2.0% in the first quarter and 4.1% in the fourth quarter of last year. Economists surveyed by Bloomberg estimate that retail sales increased just 0.7% in August; the Commerce Department will report actual sales results on Thursday.
Second, a three-year stock rally is showing its age. Corporate profits increased only meagerly last quarter and are projected to decline this quarter for the first time since 2009 (see "Election or Not, Stocks Seem Poised for Trouble in 2013"). In the event of a downturn, investors may dump companies with signs of weakness first. J.C. Penney's longer-dated bonds yield 9%. It spends more than $230 million a year in interest on its debt, and it lost $147 million in its most recent quarter.
Third, the upside for investors in the event of a turnaround success seems limited. Ignoring Penney's lack of profits, its stock trades at 0.4 times revenues. Relatively prosperous department stores like Kohl's (KSS)
Johnson's plan seems a good one and with time and cooperation from the economy, the 110-year-old retailer may face a brighter future. But that doesn't necessarily make the stock a good deal at today's price.