TheStreet columnist Rocco Pendola and retail expert Brian Sozzi have chronicled several of Walmart's failures while offering a comprehensive suggestions for how to fix them. So it's a bit disappointing that an acquisition of J.C. Penney (JCP) never made their list.
Walmart reported weaker-than-expected results Thursday, which sent the shares down almost 2.5%. (It's back up 0.3%, above $77, as of Friday at 3 p.m.) The stock has traded flat in 2014. But the shares are down 2% in the trailing twelve months.
During that span, the company has fought vigorously against federal regulation regarding taxes. It has been set back by the slow delivery of income-tax refund checks to consumers. Cuts to food stamps have hurt its consumer base.
And when you factor in the public backlash Walmart has suffered from low wages for its frontline workers and the chronic perception of unfair business practices towards "mom & pop" shops, no company has been more vilified. In my opinion, unfairly so.
J.C. Penney, on the other hand, just posted results that beat Street estimates for revenue and profits. Since J.C. Penney shares hit an intra-day low of $4.90 on Feb. 5, the stock has been on a steady upward march, up roughly 71%. And Thursday's results affirmed investors' faith that not only has this stock bottomed, but J.C. Penney is poised to be retail's best-performing stock in 2014.
To date, the only thingthat iconic retail brand J.C. Penney has been guilty of is poor execution. But things have taken a turn for the better since CEO Myron Ullman was reinstalled to replace Ron Johnson. Ullman once held the post until he retired in November 2011. As is evident in his Penney's recent results and the stock's movement, Ullman's making the right moves.
An argument can be made that Walmart has missed its optimal acquisition opportunity. But the more pressing question is about the future.
To what extent can Walmart hold onto its reign as retail's largest company in a world that Amazon (AMZN) is looking to dominate?
Customers already know they can walk into any Walmart store and get the best possible low prices. That's the differentiating factor it has over Target (TGT). Not to mention, Walmart management already has the small Neighborhood store concept in place. In the most recent quarter, revenue from that segment climbed 5% year over year.
In fact, since that concept was launched back in 2012, "Neighborhood" store growth has nearly doubled, while Walmart posted 46 straight quarters of comparable-store growth. But that's the only part of the operation that that's growing. Although management remains committed to growing the entire retail business, they've just guided to flat comparable-store sales in the U.S.
J.C. Penney, by contrast, just posted 6.2% same-store sales growth and a narrower-than-expected loss, reflecting a 27% year-over-year improvement. And Penney's management has guided for improved gross margins and a mid-single-digit increase in same-store sales. These are metrics that Walmart, which guided for flat U.S. comps, could benefit from. But it goes beyond that.
Target has shown that even bargain-hunting customers are willing to pay for some upscale products and brands. A J.C. Penney acquisition would neutralize Target's advantage, given that J.C. Penney has deals with Martha Stewart and other upscale brands. J.C. Penney's strong results were due to Ullman reinstating sales and other promotions. This falls right in line with the value proposition of Walmart stores.
Walmart's first-quarter results weren't a disaster, given (among other things) the weather-related issues impacting retail. But they were not as good as they could have been -- as we see from J.C. Penney's results. And a combined company would be a major blow against rivals like Target.
Penney shares are currently trading at around $9.65. With a market cap of $3 billion and $5.6 billion in debt, the enterprise value comes to roughly $9 billion. This deal would cost Walmart $12 billion or $15 per share. Given Walmart's $23 billion operating cash flow and another $7 billion cash on the balance sheet, money will be no object.
Walmart only needs to ask how much its new image is worth.
At the time of publication, the author held no position in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.