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J.C. Penney has good ideas but doesn’t have the resources for a turnaround, analyst says

J.C. Penney’s results offer a glimmer of hope, but GlobalData Retail isn’t optimistic

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By Tonya Garcia, MarketWatch


J.C. Penney
The Texas store isn’t a prototype or flagship, J.C. Penney says.

J.C. Penney Co. Inc. stock closed up 6.4% on Friday after narrower-than-expected losses and an upbeat earnings call filled with ideas about how to turn around the business, but GlobalData Retail still thinks it’s an uphill battle for the struggling department store retailer to return to growth.

“It finally seems to have a leader that understands retail and knows the direction the company needs to take,” wrote Neil Saunders, managing director at GlobalData.

“However, the question is whether it has the resource and energy to complete its journey. There is a slim chance it can make it if it manages to improve underlying trading by enough to stabilize losses and undertakes a gradual brand reinvention, using online to bolster sales. However, sadly, in our view, the odds are firmly stacked against it.”

On the call, Jill Soltau, J.C. Penney’s /zigman2/quotes/204684963/composite JCP -4.39%   chief executive, talked up a number of new initiatives, including a new store in Texas that uses a different logo and groups merchandise according to the occasion. For instance, “shine” is for special events, while “all day” is for casual work wear and clothes for the weekend.

Read: Old Navy spinoff thrown into question by the departure of Gap CEO Art Peck

“Our brand-defining store is not a prototype to roll our across stores. And it is not a flagship store,” she said, according to a FactSet transcript. “Our brand-defining store is the fullest articulation of our customer strategy. It is a store where we can leverage learnings from customer feedback.”

GlobalData research shows that the new store format would drive traffic and sales. However, even if the company wanted to, it would be expensive to rollout to additional locations.

“Unfortunately, the company’s debt position and its huge losses mean that it is not in the position of Target, which embarked on a similar program of store reinvention,” Saunders wrote.

Moreover, J.C. Penney stores in failing malls are a hurdle that even a store revamp can’t overcome.

“In our view, J.C. Penney needs to cut its exposure to these locations as quickly as possible so that it can concentrate on improving the locations that can deliver the best returns,” Saunders wrote.

J.C. Penney reported its earnings a day after Dillard’s Inc. /zigman2/quotes/200348006/composite DDS -0.12%   reported a surprise profit that gave shares of J.C. Penney and other department stores a boost.

See: Farfetch shares soar as Gucci, Fendi and other luxury brands target customers online

Despite this optimism, department stores as a category are facing challenges.

“Some large retail contributors like the drugstores and home improvement stores have been hurt by reimbursement pressures and softer housing markets respectively, while apparel and footwear, specialty retailers, and department stores continue to underperform,” Moody’s wrote in an Oct. 31 note.

Moody’s lowered its retail industry outlook to stable from positive and cut its 2019 operating profit growth forecast to 2% to 3% from 5% to 6%. Sales are forecast to be 3.5% to 4.5% for the year, down from a previous outlook for 4.5% to 5.5% growth.

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“Performance across the industry is experiencing rising pressures due to intense competition on the fight for market share and costs associated with the ongoing integration of e-commerce and bricks-and-mortar channels,” the note said.

Dillard’s stock is up 1.5% in Friday trading after closing Thursday up 14.2%. The stock is up 30% for the year to date.

J.C. Penney shares are up 12.5% for 2019 so far. The ProShares Decline of the Retail Store ETF /zigman2/quotes/200757065/composite EMTY +0.25%  is down 7.5%, and the S&P 500 index /zigman2/quotes/210599714/realtime SPX +0.10%   has gained 24.5% for the period.

/zigman2/quotes/204684963/composite
US : U.S.: NYSE
$ 1.09
-0.05 -4.39%
Volume: 7.67M
Dec. 5, 2019 3:04p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$364.80 million
Rev. per Employee
$126,516
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/zigman2/quotes/200348006/composite
US : U.S.: NYSE
$ 68.82
-0.08 -0.12%
Volume: 134,762
Dec. 5, 2019 3:03p
P/E Ratio
14.39
Dividend Yield
0.86%
Market Cap
$1.72 billion
Rev. per Employee
$162,582
loading...
/zigman2/quotes/200757065/composite
US : U.S.: NYSE Arca
$ 35.56
+0.09 +0.25%
Volume: 1,094
Dec. 5, 2019 2:01p
loading...
/zigman2/quotes/210599714/realtime
US : S&P US
3,116.02
+3.26 +0.10%
Volume: 989.63M
Dec. 5, 2019 3:05p
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Tonya Garcia is a MarketWatch reporter covering retail and consumer-oriented companies. You can follow her on Twitter @tgarcianyc. She is based in New York.

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