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J.C. Penney's dreadful earnings reaffirm that it probably has one foot in the grave

Brian Sozzi
Editor-at-Large

The clock is ticking on JCP.

J.C. Penney’s latest dreadful earnings report card only reaffirms one thing about the retail icon — despite a well-regarded new CEO at the helm, the company is knocking on death’s door.

While the long struggling department store retailer tried to instill hope on Tuesday by saying it sees positive free cash flow in 2019, it’s damn near impossible for any rational investor to overlook another three months of massive losses and believe things will soon magically improve. J.C. Penney’s conference call with Wall Street analysts was also nothing to write home about.

Management is asking for patience from a beleaguered investor base and scores of vendors. It’s unclear if that relatively new management team will get the benefit of the doubt for much longer.

“It’s way too late [for J.C. Penney],” money manager and retail expert Jeff Macke told Yahoo Finance.

Macke is probably right.

J.C. Penney’s problems persist into the summer

Without question, J.C. Penney enters the key summer and back-to-school selling months donning little to no sales or profit momentum. J.C. Penney’s first quarter same-store sales plunged 5.5%, worse than the year ago marginal increase of 0.2%. The company said apparel for women, men and children were its top-performing categories. But, apparently the categories weren’t strong enough to drive same-store sales growth, a profit or free cash flow.

The company lost a staggering $154 million in the quarter. Free cash flow was an outflow of $268 million compared to a $421 million outflow a year ago. Consistent with recent earnings calls under new CEO Jill Soltau, J.C. Penney highlighted weakness in appliances and furniture as primary reasons for the sales pressure. The company is exiting both categories in its stores in a bid to improve sales productivity.

J.C. Penney is also undergoing extensive research into who its customer is and what they expect to see from the retailer. Hence, there are many departments on the sales floor not performing up to snuff. The liquidation of slow selling apparel inventory has subsequently weighed on sales and profits.

J.C. Penney’s inventory declined 16% in the quarter as it sought to boost cash and exit excess merchandise.

Turnaround plan is not ‘ready for prime-time’

FILE- In this May 16, 2018, file photo, a man enters the JC Penney store at the Manhattan mall in New York. J.C. Penney Co. reports earnings Thursday, Aug. 16. (AP Photo/Mary Altaffer, File)

Soltau asked for patience on the conference call. The retail veteran acknowledged the company’s full turnaround plan is not “ready for prime-time” yet. It’s expected to be released in the coming months. Investors unlikely enjoyed hearing that. Comments from Soltau that there are no “silver bullets” or “get rich quick schemes” in trying to fix J.C. Penney also probably spooked investors.

Soltau continued to pound home the view that J.C. Penney must get back to retail fundamentals. That means knowing who the core customer is, what the right promotions are, and what should be sold on the racks.

J.C. Penney’s stock cratered 10% in early trading Tuesday despite Soltau asking Wall Street for more time to reveal her vision.

“They have one of the hottest brands in the mall in Sephora and they still had negative sales,” said SW Retail Advisors President Stacey Widlitz echoing Macke’s feelings on J.C. Penney. Widlitz thinks J.C. Penney investors should be on high alert and pay close attention to important vendors that may be losing confidence in the company and may not stick around for very long given J.C. Penney’s precarious fundamentals.

Soltau knows that the support of vendors is critical to her turnaround plan. Without vendors shipping quality items at fair prices to J.C. Penney, the company could head the way of dying rival Sears real quickly.

“We thank our vendor customers for their support and patience,” Soltau said on the conference call.

The bottom line is that J.C. Penney is running out of time. Retail is rapidly changing, and there is no clear indication there is a place in it for a department store in J.C. Penney that stands for next to nothing.

Sadly, Soltau may not get the patience she needs from a host of constituents to reposition the company successfully for the new age of shopping. Keep in mind: The company hasn’t even secured a senior leader for its e-commerce business yet.

That’s very telling.

Brian Sozzi is an editor-at-large and co-host of ‘The First Trade’ at Yahoo Finance. Follow Brian Sozzi him on Twitter @BrianSozzi

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