Has J.C. Penney Bottomed?

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J.C. Penney (NYSE:JCP) has been one of the most controversial stocks in the United States over the past couple of years. But despite this controversy, there has been only one direction in the stock’s price: down. The stock traded at a high of more than $40 per share toward the beginning of 2012, and since then, it has fallen precipitously, having traded briefly below $5 per share.

The reasons for this are fairly simple.

First, J.C. Penney has been in a lousy financial situation. The company has been losing more than $100 million every month. Furthermore, despite the fact that management has made claims to the effect that the company’s finances are fine, it has had to put up its real estate as collateral and it has even had to issue stock and dilute shareholders.

Second, J.C. Penney has been unable to define a strategy or its target market. Management has essentially tried to rebuild its disenfranchised customer base. These customers left the company given the company’s strategy of doing away with coupons coupled with the fact that the American consumer was in bad shape financially.

This more likely than not is the lethal combination that led to J.C. Penney’s horrific sales declines from 2011-2013.  J.C. Penney’s management believes that it can win these customers back. However, given the general weakness in the economy, the best chance it has at doing this is lowering prices.

This has a couple of negative consequences. First, this means that J.C. Penney is attempting to compete with companies such as Wal-Mart Stores (NYSE:WMT), Target (NYSE:TGT), and perhaps some of the dollar stores like Dollar General (NYSE:DG). While this is not an impossible task, investors should bear in mind that these companies have decades of experience in catering to stingy and lower-income customers, whereas J.C. Penney lacks this experience.

Furthermore, consumers don’t think of J.C. Penney as a place to buy things inexpensively. It follows that management wants to accomplish the impossible. On one hand it wants to bring back its old customers, but these customers have changed over the years as they are searching for bargains. Second, lower prices mean lower margins. Thus, while gross sales have likely flattened out, the large losses will continue.

It is unclear how much longer these losses can continue until the company has to issue even more stock in order to fund its day-to-day expenses. Recall that management was saying its financials were fine just weeks before it came out again to issue stock.

Third, the retail environment is generally weak, and it is highly competitive. While retail sales have been growing slowly, investors need to keep in mind that this isn’t a rising tide lifting all boats.  The best-performing retailers either cater to high-end consumers like Michael Kors (NYSE:KORS) and low-end consumers like Dollar General, or they fill a particular niche in the market place like Costco (NASDAQ:COST).

J.C. Penney certainly doesn’t cater to the high-end consumer. It is trying to cater to the low-end consumer, but it has yet to define itself as a place for consumers to go to buy inexpensive goods. Finally, it certainly doesn’t fill any market niche.

With these points in mind, I think J.C. Penney shares have additional downside. Investors would be wise to stay away from the shares despite the fact that they seem to be getting ever cheaper. The downtrend in the shares is still intact.  While there are periodic price spikes and pockets of optimism, traders would be wise to sell out of their positions on these spikes or to even take short positions whenever we get them.

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