Friday, January 11, 2013

J.C. Penney's Future Outlook Is Very Cloudy

J.C. Penney has been having a tough time lately making profits and growing sales. The company has also experienced difficult times deciding how to properly price its products. As the business gurus like to say, the retailer is in definite need of a turnaround.

And in business, that invariably means finding a new way to satisfy more customers while minimizing waste and cutting unnecessary expenses, thereby leading to renewed profitability. Otherwise investors and customers both bail out and leave the company to go out of business and its employees end up on the unemployment rolls.

When that happens, the only beneficiaries are its competitors.

After long having been a promotional house, J.C. Penney recently installed new management who relatively quickly introduced a new and different everyday pricing strategy. It looks like the strategy bombed as more and more formerly loyal customers have apparently turned to other retailers for their shopping needs.

As a result, the company is now tinkering with its business model by trying a little mix and match of both pricing strategies, but it very well may be further confusing its customer base by so doing.

Things aren't looking up at Penney's, to say the least. But it's not time to count them out yet either. That said, I won't be buying any of their shares any time in the foreseeable future. Too many other good looking fish in the sea of stocks to take a chance on owning shares of companies like J.C. Penney.

Such companies as Wal-Mart and McDonald's are the kinds of consumer oriented retail companies that look like good "fish" to me.

J.C Penney Downgraded; Liquidity Concerns Mount has the updated story:

"J.C. Penney's near-term prospects aren’t looking so hot, UBS says.

The firm warns a combination of a “deteriorating earnings outlook” and mounting signs of “cash-flow distress” will require the struggling retailer to make big changes to its turnaround strategy.

“In our view, ongoing deeply negative sales declines and rapid cash burn could compromise JCP’s ability to sustainably self-fund the investments needed for its turnaround strategy in its current form,” UBS analyst Michael Binetti wrote in a note to clients Friday morning.

He downgraded J.C. Penney’s rating to sell from neutral, while slashing his price target to $13 from $21.

Shares recently fell 4.7% to $18.25. The stock is down more than 45% over the last 12 months.

J.C. Penney is in the midst of a massive turnaround under former Apple Inc. retail executive Ron Johnson, who took over the CEO position in November 2011. The company’s sales have tumbled in recent quarters.

Johnson has said he isn’t in favor of diverging from his initial strategy of limiting discounts in favor of broadly lower everyday prices. But as we noted last month, it appeared the company became more flexible with its pricing strategies during the holiday season.

While the stock price rebounded a bit during the holiday season, the shift in strategy looks like it could come at a price. Binetti says he is “increasingly concerned” about the company’s near-term earnings trends.

“We believe trends were decelerating at the end of the third quarter and are concerned that a reversion to in-store discounting likely signals further deceleration in the fourth quarter,” he says.

“We believe both the pricing and the new shop rollout strategies are at risk, and the cash preservation outlook is becoming increasingly concerning.”

With regards to the company’s cash position, UBS estimates the retailer ended 2012 with a little more than $700 million on the books. That would mark a significant deterioration from last year’s $1.5 billion ending balance, the firm says.

“We are incrementally concerned about liquidity if the company can’t reverse dismal sales trends in the near-term,” Binetti says."

Summing Up

The saga at J.C. Penney continues.

While new management is trying new ways to successfully complete the retailer's turnaround and return to acceptable levels of profitability and sales, the customers will get the final say.

That's how markets work, unlike governments.

We'll stay tuned.

Thanks. Bob.

1 comment: