Retail in the Red: Will J.C. Penney Rise Up to Fellow Department Store Stocks?

Department store stocks like J.C. Penney rely on shoppers to move their products. And to pay off their debts.

Retail stocks are among the most tricky to evaluate, especially for value investors. Sometimes the valuation is so compelling that it seems almost too good to be true. A department store stock like J.C. Penney (JCP) falls under that category.

Since peaking at $27, shares are down steadily and finally sold off sharply from $10 in late September. Shares of J.C. Penney are now fighting to hold the $8 level, a price not seen since 1982. That means at this price, J.C. Penney is worth just 0.15 price to sales and 0.76 price to book.

No money, more problems

J.C. Penney has substantial debts. For the quarter ending July 31, 2013, long-term debt rose to $4.85 billion, up from $2.87 billion in the previous quarter. Net income was negative in each of the last four quarters:

No reversal in sight?

Short float for JCP is at a lofty 23.7%, and bears are in control. It looks as though shares will keep drifting lower. Despite the dire situation, J.C. Penney plans to replace a board member with Stephen Sadove, the CEO of Saks. Meanwhile Geraldine Laybourne stepped down from the board.

J.C. Penney has operational challenges, but it is not impossible for sales to turn around. The problem J.C. Penney faces is not similar to that of Abercrombie & Fitch (ANF), whose fashion trend is waning for consumers.

Sales need to improve… quickly

Negative cash flow and high inventory is at the heart of the problem for this retailer. J.C. Penney needs to improve sales for each of the next few months. This means winning back the customers it alienated in the last few years.

Retail stocks like J.C. Penney could continue to fall if fears that negative cash flow is too much to maintain payments to suppliers. Considering that the upcoming holiday season is a good time to determine whether a retailer’s sales are improving each month, we decided to compare J.C. Penney to similar department stores.

We looked to see which among these retail stocks has more positive cash flow. Limiting our screen to those companies with long term debt to equity ratios and total debt to equity ratios under 0.5, only four stocks remained.

They are listed below starting with the department store with the least amount of debt on its books.

Click on the interactive chart below to see monthly returns over time. 

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1. Sears Hometown and Outlet Stores, Inc. (SHOS, Earnings, Analysts, Financials): Engages in the retail sale of home appliances, hardware, tools, and lawn and garden equipment in the United States. Market cap at $734.81M, most recent closing price at $31.81.

Long term Debt/Equity: 0.

Total Debt/Equity: 0.06

 

2. Saks Incorporated (SKS, Earnings, Analysts, Financials): Operates fashion retail stores in the United States. Market cap at $2.32B, most recent closing price at $15.93.

Long term Debt/Equity: 0.21.

Total Debt/Equity: 0.3.

 

3. The TJX Companies, Inc. (TJX, Earnings, Analysts, Financials): Operates as an off-price apparel and home fashions retailer in the United States and internationally. Market cap at $40.22B, most recent closing price at $56.19.

Long term Debt/Equity: 0.33.

Total Debt/Equity: 0.33.

 

4. Dillard's Inc. (DDS, Earnings, Analysts, Financials): Operates as an apparel and home furnishing retailer in the United States. Market cap at $3.66B, most recent closing price at $78.99.

Long term Debt/Equity: 0.41.

Total Debt/Equity: 0.41.

 

5. J. C. Penney Company, Inc. (JCP, Earnings, Analysts, Financials): Operates department stores in the United States and Puerto Rico. Market cap at $1.86B, most recent closing price at $8.41.

Long term Debt/Equity: 2.12.

Total Debt/Equity: 2.51.

 

Written by Chris Lau. (List compiled by Emily Smykal. Monthly returns sourced from Zacks Investment Research. All other data sourced from Finviz.)

 

Analyze These Ideas: Getting Started

Read descriptions for all companies mentioned Access a performance overview for all stocks in the list Compare analyst ratings for the companies mentioned Compare analyst ratings to annual returns for stocks mentioned Real-Time Opinion: Scan the latest tweets about these companies (feed will open in a new window)

Dig Deeper: Access Company Snapshots, Charts, Filings

Sears Hometown and Outlet Stores, Inc. (SHOS, Chart, Download SEC Filings) Saks Incorporated (SKS, Chart, Download SEC Filings) The TJX Companies, Inc. (TJX, Chart, Download SEC Filings) Dillard's Inc. (DDS, Chart, Download SEC Filings) J. C. Penney Company, Inc. (JCP, Chart, Download SEC Filings)

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