J.C. Penney Struggles Go Beyond Stingy Consumers

There is little possibility of an upside in this dark retail story.

Debt-laden J.C. Penney (JCP) - Get Report  looks like a company doomed for a Sears-like ending. Investors seeking a solid growth investment should avoid J.C. Penney's stock, as the optimists who say that the stock is a value play are dead wrong.

J.C. Penney's issues aren't unique, as most analysts have been negative on offline retailers that are slow to innovate. But with Amazon on the scene, a sleepy brick-and-mortar player with a massive loan-burden such as J.C. Penney isn't a good buying proposition.

All is not well in the retail space.

Decades ago, the business model was to expand stores and cater to customers who would often drive quite a distance to find a store, but times have certainly changed. With e-commerce, the customer doesn't have to go anywhere and their purchases are delivered to them.

The retail sector continues to grab our attention, with TJX, Ross Stores andWalmart among those set to soon report first-quarter earnings. Last week provided a hint of things to come with weak reports and guidance from department store giants such as L Brands, Macy's andNordstrom.

J.C. Penney is among those fighting to stay relevant. Sure, the stock has risen about 11% for the year to date, but that came after the stock crashed to less than $7 a share last year from the $30s in 2012.

There are certainly more profitable opportunities out there.

Although J.C. Penney's earnings per share grew by more than an average 9% per year in the previous five years, analysts think that the company over the next half a decade will post an average annual 28% decline.

The takeaway from April retail sales, which rose 3% from a year earlier and 1.3% from the previous month, is one of a consumer spending on housing, entertainment and personal care/fitness over apparel and general merchandise.

The 10% year-over-year gain in the non-store retailer category shows the strength of the so-called Amazon effect.

Brick-and-mortar retailers are pursuing several strategies to ramp up sales.

For instance, J.C. Penney recently said that it will re-enter the appliance business. In doing so, it is trying to move to where consumers are spending money.

The company also plans to reduce its dependency on apparel, which might not be the best idea.

Sure, J.C. Penney Chief Executive Marvin Ellison is keen on a large-scale reinvention, but there seems to be an absence of really understanding trends and an insistence on doing what everybody else is doing.

There is a certain feeling of deja vu, recalling when Ron Johnson, the company's former chief executive, sent sales and profits tumbling in 2012 and 2013 with catastrophic mistakes.

In terms of earnings, Ellison's plans aren't showing quick results, though it may be a tad early to see positive signals for a company whose nearly $4.7 billion debt is twice its market capitalization.

The first quarter was challenging. Although J.C. Penney exceeded expectations on the bottom line, as selling, general and administrative expenses fell, revenue of $2.81 billion was down 1.7% from a year earlier and missed Wall Street estimates by $110 million.

One bright spot is that the company continues to maintain its full-year comparable sales guidance of a 3% to 4% increase, but gross margin guidance has been cut to just a 10-to-30 basis point increase for the year.

J.C. Penney's problems are primarily company-centric.

This volatile market still offers market-beating investments, but investors need to know where to look. Retailers such as Ross Stores and TJX, for instance, are addressing the changing landscape far better than J.C. Penney, and their stocks are better bets. 

TJX, the parent of T.J. Maxx, closed just one store last year. By comparison, J.C. Penney and Sears continued to close stores in large numbers, due to sluggish sales and profits.

There is also a build-up of inventory, with a 4%-plus increase to $2.9 billion, at J.C. Penney which could trigger a fresh spate of issues.

At nearly 10 times enterprise value to earnings before interest, taxes, depreciation and amortization, J.C. Penney has little room for error, given that its stock valuation is already in line with peers such as Ross Stores and TJS, with 11 to 12 times EV/EBITDA.

Investors should away from the J.C. Penney crash-and-burn story.

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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.