Will J.C. Penney Close 200 Stores?

J.C. Penney Co. Inc. (NYSE: JCP) will close 40 stores this year and dump as many as 2,250 employees in the process. The problem is that the retailer’s store count is almost certainly much too high, as it hovers around 1,000.

J.C. Penney has to face the issue that, although it has stopped the bleeding of revenue and brought same-store rates back to even, or slightly up, it has not recovered from the revenue drop in 2013. Its revenue was fairly even at approximately $17.5 billion a year from 2010 to 2012. That was not enough for investors and the board. The board brought in Apple Inc.’s (NASDAQ: AAPL) retail chief Ron Johnson in 2011. His tenure as CEO lasted a year and a half. In the meantime, J.C. Penney’s revenue dropped to $11.9 billion in 2013. To make matters worse, it earned a very modest $389 million in 2011. In 2013, it posted a loss of over $1.5 billion.

The 40 stores being closed are almost certainly the poorest performing. There is no logic to do otherwise. However, there is a case to be made that the number should be much higher.

Among the primary costs for shuttering so few stores is the severance and rent costs associated with most closings. As Morgan Stanley analyst Kimberly Greenberger pointed out in a report obtained by CNBC: “We think massive store closures [200+] and immediate cost cuts are unlikely given the associated cost.”

However, that is not balanced by the cost of keeping stores open, particularly if a number of J.C. Penney stores still lose money. That must be the case, based on the retailer’s ongoing losses. In the quarter it reported on November 12, J.C. Penney lost $191 million on revenue of $2.8 billion. The financial statement showed one of the retailer’s greatest weaknesses. Its debt service was $103 million, and the interest rates on the debt are high, reflecting the risk the company has going forward.

J.C. Penney has not closed enough stores. So, the question is when it can afford to close more. Based on its financials, the total will need to be close to 200.

ALSO READ: Target Finally Dumps Canadian Stores

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