Shares of J. C. Penney Company, Inc. JCP have slumped 38.5% in the past six months against the Retail-Regional Department Stores industry and the Retail Whole Sector’s rally of 17.5% and 8.7%, respectively. Industry experts cited failed leadership, high debt and dismal second-quarter results as the reasons behind the same. Also, the company’s muted fiscal 2018 view added to investors’ woes. (Read more: JC Penney Q2 Loss Wider Than Expected, FY18 View Drab)
J. C. Penney has been in troubled waters for quite some time, losing customers to cheap sellers. Nonetheless, it has been making turnaround efforts to revive its lost sheen but none seem to be working out. Earlier, the company changed its logo, store designs, advertisements and pricing model in a bid to attract consumers. But these strategies failed to deliver desired results.
Further, the company is in desperate need of a CEO, post the exit of Marven Ellison. Per sources, during Ellison’s tenure, the company had shut down 140 stores and begun selling toys and appliances alongside beauty products. Apart from this, management also focuses on women’s apparel business.
Moreover, this Zacks Rank #5 (Strong Sell) stock has been struggling with shrinking gross margin, which is likely to remain under pressure in the third quarter. Going ahead, management plans to lower enterprise inventory by at least $250 million by the end of fiscal 2019, which may hurt gross margin for the next few quarters. We note that the cost of goods sold, as a percentage of total net sales, is anticipated to increase year over year owing to management’s efforts to right size inventory levels.
Unlike its rivals that have adopted strategies to revamp stores, launched brands and enhanced e-commerce initiatives to remain relevant to shoppers, J. C. Penney is trying to accommodate the changing retail trends. Analysts believe that this may be due to the company’s difficult financial position. Nevertheless, management is not sitting idle and looking at every nook and cranny for growth prospects.
In this regard, J. C. Penney has taken up several strategic initiatives to transform from a brick-and-mortar retailer to an omni-channel company. In order to enhance customer shopping experience, the company has been focusing on remodeling, renovating and refurbishing its stores. The company has introduced a new value proposition, "Get Your Penney`s Worth” under which selected items of private brands are available for just a penny. In spite of the aforementioned endeavors, we suggest investors to stay away from the stock until it shows clear signs of revival.
Looking Beyond J. C. Penney
While J. C. Penney may not deserve a place in your portfolio now, the Retail-Wholesale sector is not devoid of stocks with sound fundamentals. The sector has been gaining from sturdy job market, improved consumer confidence and increasing consumer spending.
We have highlighted three stocks that not only carry a Zacks Rank #1 (Strong Buy) or #2 (Buy) but also flaunt a VGM Score of A or B.
3 Promising Picks
DSW Inc. DSW, which has a long-term earnings growth rate of 9%, is a solid bet. This branded footwear and accessories retailer delivered an average positive earnings surprise of 17% in the trailing four quarters. The stock, which sports a Zacks Rank #1, has a VGM Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.
Investors can also count on Darden Restaurants, Inc. DRI, which owns and operates full-service restaurants. This Zacks Rank #2 company has a long-term earnings growth rate of 9.3% and a VGM Score of B. The company has delivered an average positive earnings surprise of 3.1% in the trailing four quarters.
Target Corporation TGT, which operates as a general merchandise retailer, is also a solid bet with a Zacks Rank #2 and a VGM Score of A. The company has a long-term earnings growth rate of 6.7%. It delivered an average positive earnings surprise of 1.3% in the trailing four quarters.
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