Why JC Penney Is Collapsing to New 52-Week Lows

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It just so happens that some embattled companies involved in turnarounds just cannot really turn around for their shareholders. In the retail space, this is only becoming all too common as brick-and-mortar store retailers just cannot make up the difference of in-store losses versus online sales gains. J.C. Penney Co. Inc. (NYSE: JCP) has reported earnings, but more important than a slight net income is that the company is closing more stores and “retiring” more workers.

J.C. Penney investors have another fear to worry about — this stock is yet again at 52-week lows. If investors think this is a multiyear low, they better think again. J.C. Penney shares traded another $1 lower than the current share price briefly in February of 2014.

While the company was fast to show that it was profitable, the sad news here is that it plans to close 130 to 140 stores in the next few months. The effort is “optimize its national retail operations as part of the company’s return to profitability.” If you think you have heard this story before, it’s because you have. Investors have every reason to be wary of companies that are going to shrink themselves to profitability.

J.C. Penney shares initially traded up by as much as 2.5% in Friday’s premarket session, but after less than an hour of trading the stock was down almost 10% at $6.18. The prior 52-week low was $6.35, down from a 52-week high of $11.99.

On a GAAP basis, J.C. Penney posted earnings of $0.61 per share, compared with a loss of $0.43 per share in the fourth quarter of 2015. For the full year, the company broke even in 2016, compared with a loss of $1.68 per share in 2015.

24/7 Wall St. already has reported on the earnings report, but a special focus needs to be made here on the company’s “shrinkage” strategy. On top of the 130 to 140 store closures, J.C. Penney is also set to close down two distribution centers. The company confessed in its release that these closures will represent about 13% to 14% of the company’s total locations, but they also represent less than 5% of total annual sales and no net income.

Rather than layoffs or firings, an early retirement program is being made available for roughly 6,000 eligible J.C. Penney associates. It was spun to say that the company expects to see a net increase in hiring as the number of full-time associates expected to take advantage of the early retirement incentive will exceed the number of full-time positions affected by the store closures.

Investors hate contraction, and despite all the efforts, J.C. Penney’s same-store sales were down by 0.7% in the quarter and were flat compared with the 2015 fiscal year. Full-year revenues slipped 0.6%, from $12.63 billion in 2015 to $12.55 billion 2016.

On top of sales woes, the company’s gross margin fell by 3.7% in the fourth quarter. Margins also fell by 1.6% for all of 2016. What is interesting about the drop in margins is that the company noted how its operating expenses fell by nearly 25%. This was from $1.38 billion down to $1.04 billion, of which $200 million was due to reduced pension expense.

J.C. Penney’s outlook for 2017, including the impact of closing stores, calls for same-store sales to be flat, plus or minus 1%. Maybe flat is the new up.

Gross margin in 2017 is now projected to improve by 20 to 40 basis points, while its SG&A expense is expected fall by 1% to 2%. The company’s forecast for 2017 earnings (adjusted) is for a range of $0.40 to $0.65 per share.

Cutting costs and closing stores can be a painful experience, and this issue with the gross margin is of no comfort.

One more negative takes place when big companies close their stores. The shells of the stores that get left behind often sit vacant for years and basically have an invisible sign that says “This company just died here, stay away!”

Again, investors hate contraction. If a company is growing, there are many opportunities. If a company is shrinking, all they can do is read Machiavelli and other cruel philosophy books on how to do better.

It may be of little surprise now that this stock is back at a 52-week low. Investors need to heed the next rule of companies in contraction and those hitting 52-week lows. Sadly, stocks hitting 52-week lows often keep hitting new 52-week lows thereafter.