There is a front page article on Seeking Alpha today claiming that J.C. Penney (JCP) is poised for a “Bank of America type recovery”. I do not even want to link to this article as by linking to this article, I would help give it exposure, in effect helping to promote the spread of misinformation. If you really want to read it, you can visit Seeking Alpha and see for yourself.
That being said, I would not recommend wasting even a single minute of your day reading this article. The idea that JCP is going to recover and even thrive can only be described as ludicrous. In this article, I will layout the case for why it is inevitable that J.C. Penney is going to go bankrupt and there is not a single thing anyone can do about it.
J.C. Penney and Bank of America Have Two Very Different Problems
Bank of America almost went out of business because a lot of people defaulted on their loans. While Bank of America made some really bad investments, they still possessed a real, working business model. Mortgages aside, Bank of America was still functioning as a bank for millions of people along with divisions engaged in other profitable banking activities. J.C. Penney is a business without a viable business model that is going through its inevitable decline into nothingness.
Bank of America’s problem had a clear cut resolution: use revenue from other aspects of the business to pay down the losing mortgage business. While it might mean the company would flounder for a years until their bad debts could be repaid, if they could avoid bankruptcy, they could eventually pull themselves out of the mess. Given that Bank of America has a real business, after cleaning up the original mortgage mess, they could even go on to once again profitably engage in mortgage lending (hopefully this time to more qualified buyers).
J.C. Penney’s problem has no solution. Their problem is that they have no business model. Bank of America is a good business with a bad balance sheet. J.C. Penney is a bad business with no hope of recovery. Department stores are dead, plain and simple. Think about the offerings of your typical J.C. Penney store:
- Various Small Kitchen Appliances, Cutlery, and Home Wares
- Low to Mid End Designer Shoes
- Make-Up & Cosmetics
- Men’s Suits and Women’s Dress Clothes
- Women’s, Men’s, and Kids Clothing
J.C. Penney has rapidly lost business to Amazon in the small kitchen appliances and cutlery spaces. Home Wares also have not online gone to better-priced retailers like Bed, Bath, and Beyond and Wal Mart. Designer Shoe Warehouse is taking the shoe market while niche make-up stores like Ulta and online brands have taken significant business from the cosmetics department.
Online prices have also significantly hurt the jewelry counter. While many people still like to buy jewelry in person, the ability to price-check items online has forced retailers like J.C. Penney to adopt more reasonable prices for their jewelry in order to remain competitive, lowering margins.
Men’s Warehouse has really put a damper on J.C. Penney’s ability to sell suits in the $300-$1000 range. Men’s Warehouse also gives big discounts on dress shoes, shirts, and ties to men who buy suits, taking those sales away from J.C. Penney as well. Target’s clothing line has also significantly hampered the ability of J.C. Penney to sell regular everyday clothes, especially in the women’s and kids’ departments.
Right now, J.C. Penney’s stores are simultaneously too big while still not offering product lines enticing enough for consumers that are used to the vast selection provided by the world wide web. Why would a shopper go to J.C. Penney to buy home wares when they can get a much larger selection at lower prices on Amazon, Bed Bath and Beyond, or even at Wal Mart? Why would women who want to try out a lot of new make-up shop at the tiny cosmetics counter in J.C. Penney when they can sample a huge variety of cosmetics at a store like Ulta?
It does not help that J.C. Penney relies heavily on mall foot traffic in an age where malls are going out of business. Whether they are losing business to online retailers or the shopping center 2.0 (new higher-end shopping centers with loaded with hot newer stores like Designer Shoe Warehouse, Home Depot, Bed Bath & Beyond along with fast casual places like Chipotle and Panera), malls seem to be a dying breed.
Any Increase in Online Sales Is A False Hope
One of the points raised in the Seeking Alpha article mentioned in the beginning of this post was that J.C. Penney’s online sales are increasing quickly, but these sales are overshadowed by rapidly declining retail sales. This is seen as a secret upside; the idea here is that eventually J.C. Penney is going to eventually re-emerge as an eCommerce leader.
This sort of data is easy to manipulate, but also easy to spot if you know what you are looking at. Upon further inspection, there is no evidence to indicate that J.C. Penney’s online business is thriving. In particular, we can view J.C. Penney’s Alexa site info, which shows that the popularity of J.C. Penney’s website is undergoing a steady decline. If sales are up, perhaps it was because they are buying more targeted traffic through Google AdWords (which greatly cuts into margins and has an upper limit). Another factor could result in increased sales such as website redesign that improved conversions. Perhaps sales or promotions drove past customers to buy at their online store.
Regardless of how sales were increased, unless J.C. Penney’s online traffic stops declining and instead starts growing, any such increase in sales is unsustainable. It will be almost impossible for J.C. Penney’s website to gain traffic given that they are continually closing stores. With less offline exposure, it will be harder for people to think to go on jcpenney.com to order goods. J.C. Penney’s website has absolutely no chance of gaining any sort of market awareness over giants like Amazon and Zappos, meaning a continuing decline in traffic is all but inevitable.
The Bottom Line: Stay Away from JCP
Perhaps JCP will be able to recovery temporarily, but it will only be temporary. J.C. Penney no longer has a working business. The entire concept of a department store is completely outdated. Amazon is doing most of what J.C. Penney used to do and delivering items at the fraction of the price and with higher consumer confidence (as shoppers can read real customer reviews on Amazon). Other niche stores with expanded offerings in a particular areas are stepping in to fill whatever Amazon cannot. JCP does not stand a chance.