Buoyed by promises of invigorated infrastructures, “right-sizing” protocols, and ultimately, a brighter future, investors slowly capitalized J.C. Penney’s (NYSE : JCP) rebranding efforts. At first, the changes were largely aesthetic: gone were the hopelessly archaic advertising campaigns of years past, replaced quickly with modernized visual accoutrements and slick copy-editing. Then, the monetary rewards became evident, with the retailer’s equity shares typically making large intra-day jumps. For those that initiated long positions at depressed prices, J.C. Penney was the gift that kept on giving, with nary a refund request in sight. But with the recent implosion in domestic and international financial markets, investors may end up wishing they had kept their receipts.
From a fundamental perspective, it doesn’t take too long to discover why a sustained recovery effort was, and is, bound to fail. Annual revenue, or top-line sales, is declining, along with a worrying slide in gross profit margin. As expected, net income is deep in the red and has been for several years. But the balance sheet tells the other side of the story, one that is more compelling and highlights the real problem not just affecting J.C. Penney, but major institutions and government bodies across the globe. In order to finance executive management’s ambitious (and some would say futile) rebranding efforts, the company had to dive further and further into debt. As it stands, long-term debt is larger than any singular asset except for property, plant, and equipment. With the overall market share shrinking for J.C. Penney (as evidenced by their declining revenue in spite of the aforementioned housecleaning), their financials are in an untenable situation. Capitalization towards this experiment is akin to investment disaster.
For a while, specifically, March of 2014 until September, investors were happy to put on the blinders and were obliged to do so based on the rewards that the Street was giving them. Bullish swing traders especially received the deal of a lifetime. The economy was rockin’ and the blue-chips were rollin’. At some point, however, the music had to stop. And on October 8th, it did just that.
In one of the worst single-day performances in recent memory, JCP shares opened trading at $9.25, with the bulls hoping to repair damage done over a series of sell-offs that saw the price action drop below the 50 day moving average, a critical barometer used by technical analysts to gauge market confidence. However, macro-economic concerns as well as the company’s own lack of vigor combined to plummet equity valuations well below the 200 DMA, a lagging indicator used by analysts to visually determine price support. The immense volatility finally ceased with the close coming in just under 8-and-a-quarter. Two more bearish “gap-down” sessions followed, where the opening price of a new session is below that of the prior day’s closing price. At time of writing, the dust settled at $7.12, a 23% loss over the course of just three days.
The contrarian argument of course is that the volatility is presenting a unique opportunity to buy up shares of an iconic American company at pennies on the dollar, no pun intended. But apropos of common investment adages is another one from the retail sector: “you get (for) what you pay.” By acquiring positions in JCP, an investor is essentially hoping for a sentiment reversal, one that is unlikely given the fact that the price action has fallen past long-term support channels, and that bearish acceleration tends to cut far more deeply than its inverse variant.
The other dubiously distinctive characteristic of J.C. Penney is that there is no fundamentally rational reason to own its equities. While its core assets do outweigh its liabilities, in practical terms for common stock investors, this is mere semantics. If the company is forced to cease its operations and liquidate its assets, common share holders are the last in line to receive compensation. Its financial performance provides no confidence that a turnaround is imminent, and the tenuous macro-economic environment is further evidence that this ship has likely sailed.