 JCPenney’s (JCP, Financial) turnaround story looks impressive.
However, when it comes to turnaround stocks, investors tend to get greedy and bid up the stock with unrealistic expectations. JCPenney has performed really well under the new CEO, but there’s still a long, long way to go for its turnaround to be complete.
The entire retail sector is witnessing a weak sales trend. As a result, retailers across the U.S. have been forced to shut down stores to improve efficiency and curb losses. According to Green Street Advisors, the department store sector would have to close another 800 stores to match the level of sales per square foot it generated back in 2006.
Although the firm expects Sears Holdings (SHLD, Financial) to close the most number of stores, JCPenney is still on the list, and falling store count is not a sign of a stock that is close to a turnaround. While streamlining its business is a positive, falling sales and closing stores are red flags heading into earnings.
JCPenney is expected to report its earnings in the middle of next month, and I expect the retailer to fall short of the consensus. Analysts are expecting JCPenney to post a loss of 36 cents per share, much lower than last year’s loss of 57 cents.
On the sales front, JCPenney’s top line is expected to grow by a mere 2.7% to $2.93 billion. However, amid the weak sales environment, I wouldn’t be surprised if JCPenney fails to deliver on the estimates, which eventually will result in a reversal in its recent rally.
Given the current prospects of the retail industry, investors should be extra cautious and shouldn’t bet on the turnaround of companies like JCPenney and Sears Holdings. Despite the apparent turnaround, JCPenney’s debt is growing at a rapid rate. The company has a total debt of $4.8 billion as opposed to cash of just $900 million.
With interest expenses still high and sales falling, I don’t expect JCPenney’s turnaround to last long.
Conclusion
With JCPenney expected to report earnings next month, investors should be cautious as the entire sector is witnessing a slowdown in sales. Moreover, with JCPenney’s debt and interest expenses increasing, the stock is still a long way from a successful turnaround. Although the new CEO has done a good job, I would advise against buying JCPenney heading into earnings.
