With the stock plummeting post-earnings on Thursday, let me provide some deeper insight.
A couple weeks ago, I reached out to J.C. Penney to schedule some time with either: (1) CEO-Designee Marvin Ellison or (2) CFO Ed Record. CEO Mike Ullman never gives interviews.
I figured that after hyping the start of the holiday season immediately following Black Friday, the company would deliver a decent quarter. I believed they would want to get the word out on its strengthening turnaround story.
I also believed that after months of getting to know the inner workings of J.C. Penney -- and likely having a business plan in hand -- Ellison would be paraded around to media to trumpet the holiday quarter and perhaps share parts of his long-term vision for the department store retailer.
I was politely rebuffed, however, by J.C. Penney (who has always been incredibly helpful with data), with the company simply saying it was "not planning any media interviews" post earnings. "Hmm, isn't this the same company that gave me a free throw blanket and set forth ambitious long-term guidance at a New York City analyst day in October last year?" I thought.
I then had an inkling the quarter didn't go exactly as well as J.C. Penney planned from a bottom-line standpoint (picked-up discounts in the stores in January were also a red flag).
But, the executives at the company have nobody to blame for themselves for the market's swift, corrective action -- they set the bullish expectations in the market via a barrage of upbeat commentary. For J.C . Penney to not produce a profit on a strong 4.4% same-store sales increase in its largest volume quarter of the year is mildly disturbing.
I believe it sheds light on a host of fundamental issues that are likely to pressure the stock even more in the near term. They include:
- The J.C. Penney of the future laid out on analyst day, one chock full of redesigned fixtures and signage, is not going to be chain-wide anytime soon. That leaves the retailer still in outdated formats in key departments like footwear and women's handbags. I believe market goers bought into the notion the retailer had the ability to aggressively push forward J.C. Penney 2.0, but those expectations have to be tempered (as they never should have been made in the first place).
- J.C. Penney's debt load is stifling any operating profit the company could eke out. That has me concerned about the bottom line potential in non-holiday periods, at least until J.C. Penney develops the financial firepower to begin bringing down its debt load.
- J.C. Penney may not return to its peak profit margins from Mike Ullman's prior tenure amid investment needs to upgrade online infrastructure and the level of discounting required to sell apparel and home goods in the mall.
- J.C. Penney simply needs more product departments selling well, other than home and men's apparel, to thrive.
- The store base has to be reduced further, in spite of the exec team's assertion that most of its locations are not profit drags. Time to spend the cash and buy out of leases early.
J.C. Penney's holiday quarter says this: Its long-term profit forecast will have to be reduced and some form of capital raise in 2016 could be realistic. Neither of these things is what investors were prepared to hear.
I always enjoy talking with Dunkin Donuts (DNKN - Get Report) execs. Doing so gives me a ton of street cred at a family dinner table full of Dunkin Donuts coffee loyalists. But I have been lukewarm on the stock for a while now due to competitive concerns and possible store oversaturation.
In chatting with Dunkin's CEO on Thursday, however, I left with a greater appreciation on the potential impact of its new K-Cup rollout at grocery stores and retailers beginning mid-year. Keep in mind that Dunkin Donuts in the past just sold K-Cups for Keurig machines in its own restaurants -- Starbucks (SBUX - Get Report) sold 100 million K-Cups alone in December of last year!
Barring a macro disaster, or McDonald's (MCD - Get Report) giving away free iced coffee for a month, analysts will be forced to raise their 2015 earnings per share numbers significantly on Dunkin due to the K-Cup rollout. I think you could get a few more points on the stock from here.
Editor's Note: This article was originally published at 10 a.m. EST on Real Money on Feb. 27.