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J.C. Penney Company Inc.: To Buy Or Not To Buy?

Summary

J.C. Penney Company Inc. has faced significant operating issues over the last years.

This bricks-and-mortar mass-market retailer continues its transformation while trying to craft a strategy in order to improve its business model.

I will definitely stay far from this company at the current levels while a short position at $9.60 is completely understandable.

Introduction

Amid ever changing fashion preferences and ruthless competition in the retail industry, I can only assure you that I am leaving no stone unturned in an effort to find the next Nike (NYSE:NKE) and the next Quiksilver (OTCPK:ZQKSQ) from the consumer goods & services sector that will outperform and underperform respectively. On that front, I discouraged the fundamental investors from buying Sears Holdings (NASDAQ:SHLD) and Seritage Growth Properties (NYSE:SRG) at $26/share and $42/share respectively, while also suggesting them short these two stocks at those prices, as shown in detail in my previous article.

In addition, I encouraged the value-oriented investors to steer clear of Birks Group (NYSEMKT:BGI) at $1.06/share and Bon-Ton Stores (NASDAQ:BONT) at $18.16/share, as shown in my articles here and here. And since my bearish calls, these two stocks have dropped between 20% and 80%, given that Birks Group and Bon-Ton Stores currently stand at $0.82/share and $3.25/share respectively.

Could J.C. Penney Company Inc. (NYSE:JCP) be the next Quiksilver or the next Nike? Is J.C. Penney poised for a turnaround? Does it deserve its current valuation? Or, has it risen too much? Well, I am going to answer these questions in the next paragraphs.

Navigating The New Retail Landscape

Heraclitus, an ancient Greek philosopher, has said that: "Everything flows and nothing stands still". And this centuries-old proverb applies to everything in life, including the retail industry of course. Therefore, I believe that the potential investors have to be mindful of the following key points before investing in a company from the consumer goods & services sector, including J.C. Penney of course:

1) Q2 GDP growth was revised up to 3.9% last week, and GDP growth is expected to continue and improve in H2 2015 despite the strong dollar. Meanwhile, the U.S. job creation machine keeps kicking into high gear. The U.S. economy continues to create jobs, the unemployment rate stands at 5.1% and gas prices are at multi-year lows giving consumers billions more to spend.

Therefore, and after years of reticence on the part of shoppers to spend, it is not surprising that we have moved well beyond the days of consumer pessimism. Consumer sentiment for September 2015 was 87.2, while retail sales excluding automobiles, gasoline, building materials and food services increased 0.4% in August after an upwardly revised 0.6% increase in July.

These figures are tailwinds for online retailers and department stores selling from clothing and sporting goods to electronics and appliances. And, this renewed mood to spend will most likely continue to be reflected in the holiday numbers that will be out in the coming months.

2) Despite the aforementioned positive indicators and trends, we are in a difficult and highly competitive retail environment because shopping habits have changed a lot. To navigate the new retail landscape and drive growth amid a challenging environment (i.e. volatility in commodity and currency markets, new risks such as cybersecurity), most retailers have implemented a survival plan that includes, among others, the development of its e-business.

Over the last few years, embracing online shoppers is a key to boost business, with primarily tech-savvy consumers finding it convenient to shop online. No, the brick-and-mortar world is not dying, it is just changing and the omnichannel growth strategy is absolutely vital to any retailer's growth plan. This is why, every retailer is focused on strengthening its Internet offerings and developing a strong omnichannel presence in order to become a better omnichannel operator.

On that front, the Census Bureau of the Department of Commerce announced in August 2015 that the estimate of U.S. retail e-commerce sales for the second quarter of 2015, adjusted for seasonal variation, but not for price changes, was $83.9 billion, an increase of 4.2% (±0.9%) from the first quarter of 2015. Total retail sales for the second quarter of 2015 were estimated at $1,171.5 billion, an increase of 1.6 percent (±0.2%) from the first quarter of 2015. The second quarter 2015 e-commerce estimate increased 14.1% (±1.1%) from the second quarter of 2014, while total retail sales increased 1.0% (±0.4%) in the same period. E-commerce sales in the second quarter of 2015 accounted for 7.2% of total sales.

On a not adjusted basis, the estimate of U.S. retail e-commerce sales for the second quarter of 2015 totaled $78.8 billion, an increase of 5.1% (±0.9%) from the first quarter of 2015. The second quarter 2015 e-commerce estimate increased 14.4% (±1.1%) from the second quarter of 2014, while total retail sales increased 0.9% (±0.4%) in the same period. On a not adjusted basis, e-commerce sales in the second quarter of 2015 accounted for 6.6% of total sales.

And, the upward trend on an adjusted and not-adjusted basis is illustrated below:

and below:

Of course, Amazon (NASDAQ:AMZN) has raised the bar for everyone, being the world's first online superstore while currently working to crack the code for widespread same-day shipping, which will instantly disrupt the entire retail world. As a result, major retailers step up their game and continue to take initiatives in order to expand and strengthen their online business.

For instance, Liberty Interactive (NASDAQ:QVCA) acquired Zulily (NASDAQ:ZU) a few weeks ago, Nordstrom (NYSE:JWN) bought HauteLook a few years ago, while other flash-sale sites like privately-held Vente-Privee, Gilt, Rue La La and Ideeli could be the next takeover targets for brick-and-mortar retailers who want to benefit from the flash sale phenomenon. Although the initial buzz of the flash sale sites has largely gone, these sites remain popular because they typically put high-fashion clothes and accessories on deep discount for a few days or even hours, helping designers quickly unload surplus inventory and consumers save money. In other words, they are an online execution of what works offline with firms like Ross Stores (NASDAQ:ROST) and the TJX Companies (NYSE:TJX).

3) New entrants is another key characteristic of the evolution of the retail industry. Some of these startups are revolutionary disrupting the retail industry while changing the way we shop.

For instance, privately-held retailer Hointer is taking humans out of the stores and uses robots to deliver your selections to the fitting room, while privately-held Storenvy, Big Cartel, Etsy (NASDAQ:ETSY) and Shopify (NYSE:SHOP) have created shopping platforms that help the vendors get a simple store online and running. In addition, privately-held Knot Standard is an online retailer that provides you with some idiot-proof self-measuring guides and lets you measure yourself head to toe in order to have your custom made suit and shirt. Pinterest, another privately-held company, is on everyone's lips these days because it has created an innovative platform where people share things they like. Therefore, Pinterest proves to be a boon for many retailers like https://www.pinterest.com/wholefoods/ (NASDAQ:WFM), https://www.pinterest.com/gap/(NYSE:GPS), https://www.pinterest.com/target/ (NYSE:TGT) that alter their...


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