Ever since mid-2017, I’ve warned time and time and time again that struggling mall retailer J.C. Penney (NYSE:JCP) was headed for the retail graveyard, and that JCP stock is a strong sell.
During that stretch, JCP stock lost 95% of its value, dropping from $4 … to 20 cents.
And now, it appears the final nail is in the coffin.
Sources told Reuters in mid-April that J.C. Penney is exploring filing for bankruptcy, as the company’s turnaround hopes have been dashed by the coronavirus pandemic.
For bears like me, this news comes as no surprise. It’s simply the beginning of the last chapter for J.C. Penney, and confirmation that JCP stock is ultimately heading to zero.
Needless to say, investors should stay far away.
What Went Wrong?
Anytime someone brings up J.C. Penney in a conversation, the biggest questions is inevitably: what went wrong?
After all, J.C. Penney was once a stalwart of mall retail. A shining star at the epicenter of shopping. Now the company is an afterthought on the brink of extinction. How did that happen?
The company was too slow to adapt in a retail world that has changed dramatically over the past decade. Specifically, the internet changed the retail game. E-commerce became a thing. Shoppers migrated from buying in stores, to buying on websites.
In response, many physical retailers adapted. They closed some physical stores to account for lower brick-and-mortar traffic, and revamped others to make the physical shopping experience more exciting for consumers. They also invested in building out bigger online presences with stronger omni-channel capabilities. Just look at Walmart (NYSE:WMT) or Target (NYSE:TGT).
J.C. Penney didn’t do any of that. For years, while the e-commerce wave swept over the retail landscape, the company did nothing. They didn’t revamp stores. They didn’t build out a budding e-commerce business. Nor did they develop omni-channel capabilities.
Sales naturally deteriorated. So did profit margins. And cash flows.
By the time management realized that they needed to change, it was too late. Cash flows had so badly deteriorated that management barely had enough resources to keep the doors open, let alone revamp stores or build out an e-commerce platform to rival Walmart, Target, or Amazon (NASDAQ:AMZN).
And so J.C. Penney is where it is today. A largely undifferentiated, antiquated mall retailer with insufficient resources to save itself.
Why There’s No Rebound Coming
Investors have been betting on a JCP rebound for the past three to five years. It hasn’t come yet, and it isn’t coming anytime soon.
Yes, the company has enough cash on hand and liquidity to survive the next few months as stores remain closed amid the coronavirus pandemic. But that’s not the problem. The problem is what happens after the pandemic passes and stores re-open.
In a best-case scenario, the world goes back to normal, and physical shopping traffic is the same as it was in 2018, 2019, and early 2020. That’s not great news for JCP. In 2018, comparable sales dropped 3.1%. In 2019, they dropped 7.7%. At the beginning of the year, management was calling for a 4% drop in comparable sales in 2020.
In other words, even if things do go back to normal, “normal” for J.C. Penny is steady comparable sales declines. Such declines won’t allow for sufficient enough margin expansion to drive healthy cash flows or profits, and will inevitably lead to bankruptcy.
The kicker? Things probably won’t go back to normal for a long time. Yes, the economy and retail stores will re-open soon. But JCP stores won’t be that crowded. Consumer hesitancy will stick around until the third or fourth quarter, probably. That means JCP won’t do -4% comparable sales growth this year. The company will probably do -8%, or worse.
If so, the coronavirus pandemic has only accelerated JCP’s path towards bankruptcy. It should be no surprise, then, that this company is considering filing for bankruptcy today.
The Bottom Line on JCP Stock
Stay away from JCP stock. I’ve been singing the same tune for the past three years. JCP stock has dropped 95% during that stretch. I’m doubling down on my bearishness today: stay away from JCP stock. Bankruptcy is likely, if not inevitable. Ultimately, this stock is going to zero.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.