Does JC Penney Need to Close More Stores?

November 4, 2017 by Douglas A. McIntyre

J.C. Penney Co. Inc. (NYSE: JCP) trades at a multiyear low and has fallen relentlessly for the past 10 days. The company deeply injured its investors with a bleak assessment of its future. Among the things that appear inevitable of the century-old retailer is that it will need to close more of its nearly 900 stores.

An army of downgrades to J.C. Penney shares and the shock of a sell-off of the stock with heavy volume was precipitated by this announcement:

Outlook
The Company has updated its 2017 full year guidance for comparable store sales, cost of goods sold, adjusted earnings per share, and free cash flow and reaffirmed its guidance for SG&A. The fiscal 2017 full year guidance has been updated as follows on October 27:

Comparable store sales: now expected to be -1 % to 0 %;
Cost of goods sold: now expected to be up 100 to 120 basis points versus 2016;
SG&A dollars: expected to be down 1 to 2 % versus 2016;
Adjusted earnings per share: now expected to be a positive $0.02 to $0.08; and
Free cash flow: now expected to be $200 million to $300 million.

Before the news, a limited number of investors believed the company was on the mend and would post an advance in same-store sales for the holidays.

J.C. Penney lists its retail operations as approximately 875 stores in the United States and Puerto Rico. For some reason, the company is not confident enough to give an actual store count. Its other operation is JCPenney.com. The company made no mention that e-commerce would soften the blow of poor results for the balance of the year. Such news would have given investors a straw to hang onto.

Any retailer with J.C. Penney’s admitted weakness has too many locations. As it skates on razor-thin margins (which are sometimes losses), some of its locations must be losing money, and in some cases a fair amount. Those locations need to disappear, as quickly as possible, for J.C. Penney to have a chance to survive. Store closings have been routine at other retailers recently. For example, Sears announced it will shutter another 63 stores in January.

J.C. Penney does face a problem when it closes stores, which is more pressure on its own finances. Some stores have leases, and workers released have to be paid severance. Neither of those things offsets the need for the obvious, however.

The only group with the data on which J.C. Penney stores are bleeding is J.C. Penney management itself. It needs to use the information. Its future is running out of daylight.

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