Sucker Rallies in J.C. Penney and Best Buy

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Shares in Best Buy Co. Inc. (NYSE: BBY) rose 25% in the second quarter. J.C. Penney Co. Inc.’s (NYSE: JCP) stock was up 15%, in contrast to a 3% rally in the S&P 500. There is no reason for shares in the two retailers to be up at all.

Best Buy continues to operate at the mercy of Amazon.com Inc. (NASDAQ: AMZN) online, and retailers including Costco Wholesale Corp. (NASDAQ: COST), which sells the most popular items that Best Buy sells and rejects stocking the balance of the products. Whatever hope investors have for Best Buy’s future, revenue in the most recent quarter fell to $9.4 billion from $10.4 billion in the same quarter a year ago. Operating margins fell to 1.8% in the quarter from 2.5% last year. Same-store sales fell 1.3%. That compares with a drop of 5.2% in the first fiscal quarter last year. However, contraction is contraction, even if it slows. Best Buy cannot make any reasonable case for a recovery, particularly when it clearly has too many stores and a weak online formula.

Sharon McCollam, Best Buy executive vice president, chief operating and chief financial officer, offered an extremely vague description of future recovery plans:

As we look forward to the second quarter, while not providing financial guidance, we believe that the ongoing investment in price competitiveness that contributed to our gross profit and EPS declines in the first quarter will continue into the second quarter. Additionally, disruptions caused by the physical deployment of the Samsung Experience Shops and the optimization of our retail floor space are expected to have operational impacts during the second quarter. We also expect to see a greater negative impact from our Renew Blue capital and SG&A investments in the second quarter in the areas of (1) online; (2) mobile; (3) the multi-channel customer experience; and (4) the replatforming of bestbuy.com for which financial benefits are not expected to be realized until fiscal 2015 and beyond.

If it is possible, the situation at J.C. Penney is even worse. Its new chief executive officer, Myron E. (Mike) Ullman III, who was pushed out two years ago, only to be brought back by a desperate board, commented when the retailer released its most recently earnings:

We are looking forward, not back, and undertaking initiatives to ensure we have a successful future. We are intensely focused on renewing customer excitement and loyalty through a combination of new attractions and long-beloved brands, with a promotional cadence that customers can appreciate and count on. There is a good deal of work ahead, but by listening to our customers and providing the shopping experience they want, we are confident we will deliver for them and improve performance for the benefit of our suppliers, associates and shareholders.

The comment about the “work ahead” is a major understatement. Among the information in the earnings announcement in that past quarter:

Total sales in the first quarter were $2.635 billion, a decrease of 16.4 percent from $3.152 billion in the same period last year. Comparable store sales decreased 16.6 percent for the quarter and were negatively impacted by the ongoing transformation of the home department.

Even worse, J.C. Penney had nothing positive to say about online sales. Like Best Buy, J.C. Penney cannot compete in the new world of retail without a surge in e-commerce revenue. The lack of that, in both cases, speaks volumes about the absence of a turnaround.

Improvements in the operating numbers of the retailers is now impossible, even if one of the other shows a modest uptick from terrible to bad.

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