J.C. Penney (NYSE:JCP) continues to fight for its life, but that doesn’t mean investors have to get long on JCP stock.
The novel coronavirus has hampered the retail sector, as well as many other industries and sectors. However, retail in particular is feeling the pinch — and perhaps that’s because many in this group have already been under pressure.
Neiman Marcus and J. Crew both filed for bankruptcy, and now, many assume J.C. Penney will too.
With that in mind, let’s dive into JCP stock.
The Rumors on JCP
According to reports, J.C. Penney could file for bankruptcy as soon as this week. Moreover, the company is looking to secure $450 million in financing. One option under discussion includes the retailer drawing half of those funds immediately, with the rest of the $225 million coming down the road if JCP can hit certain milestones.
Sounds nice, but is it really worth it?
Shares caught a pop on the news, ending higher by 11% on Wednesday when the rest of the market was hit hard. That’s after JCP hit a new 52-week low in the prior session. After closing at 22 cents on Wednesday, is it possible this stock doubles?
It’s a possibility. But with so many great retailers out there, is the one circling the drain the one you really want to bet on? Those who answer that question with a “yes” are gambling, in my opinion — not investing.
Breaking Down Retail
Buying JCP stock because it might get lender financing or that it might survive another few months isn’t investing. Unless that given investor specializes in bankruptcies and special situations, all of this hinges on what kind of deal Penney’s can swing.
Either way, what’s the end goal? To bridge its operations until the country begins to reopen so that it can make it through the holidays? There’s a reason shares have gone from a 2016 high of $12 to ending 2019 near $1. Remember, that’s before the coronavirus pandemic.
Sad as it is to say, the coronavirus simply accelerated the trends that were in play. While that’s benefited companies like Netflix (NASDAQ:NFLX), the struggling retailers are going out of business. Sure, they likely would have anyway, but the process is being sped up.
That said, not every retailer is hurting. Look at the stocks of Home Depot (NYSE:HD) and Lowe’s (NYSE:LOW). They are rebounding hard as consumers — despite many being out of work temporarily — are tackling household projects.
Look at Target (NYSE:TGT), Costco (NASDAQ:COST), Kroger (NYSE:KR) and Walmart (NYSE:WMT). These big-box retailers are thriving as consumers continue to buy essential (and some non-essential) supplies. They all saw initial spikes in sales as consumers bulked up their pantries and supply cabinets. But with so many stuck at home, sales should remain steady.
It’s easy to get carried away and look for out-sized growth from these companies. But simply not falling apart is a victory in my eyes, particularly for this sector. Of course, we can’t forget about Amazon (NASDAQ:AMZN) — and the e-commerce giant has been as busy as ever.
The Bottom Line on J.C. Penney
I don’t know if J.C. Penney will file for bankruptcy this week or this month. What I do know is that the company and JCP stock has been on the ropes for years. Somehow the company does just enough to make it to the holidays, where a strong economy has kept them afloat for years.
Obviously it’s an unfortunate event for its employees and no one likes to see people lose their jobs. But from an investment perspective, this one has been under pressure for a long time; the writing has been on the wall.
Let’s put it this way:
Sales have declined in each of the past four years, as has net income. While fiscal 2017 ended with break-even results net income, JCP lost $268 million last year. Current assets of $2.7 billion do edge out $1.9 billion in current liabilities. But with $2.1 billion of current assets (79%) coming from inventory, this current ratio is misleading. Every department store has bloated inventory and the reduces its value.
The retailer has $4.6 billion in long-term debt. How is a company with a $71 million market cap supposed to survive under that kind of burden? The short answer is, it can’t. It’s just a matter of how long it can survive in the meantime.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.