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Why JC Penney Is Destined to Go Bust

- By Akshansh Gandhi

It appears most physical retailers will become extraneous in the years to come as the competition from online retailers has consistently nibbled away at their business. This trend will likely continue as physical retailers, due to higher operating costs, will struggle to compete against online retailers. Wide-scale shutdowns of retail outlets across the U.S. have already begun.


Retail stores are at an inflection point, and buying them does not make sense to me. With the sales downtrend expected to continue, I think investors should look for shorting opportunities in the sector. Speaking of shorting, J.C. Penney Co. Inc. (JCP) would make a great short at current levels.

Declining sales

J.C. Penney reported another underwhelming quarter in what seems to have become a trend. The company's revenue fell 1% on a year-over-year basis to $3.96 billion, falling short of the analysts' estimates by $20 million.

The company's fourth-quarter EPS came in at 64 cents, beating the estimates by three cents. Since the EPS figured can easily be manipulated, I think investors should focus on the company's declining sales and not its profitability. J.C. Penney can improve its profitability by cutting costs and shutting down stores. While this tactic may give the stock a bump in a few quarterly earnings reports, in the long run, it would spell the company's demise.

The company's massive debt and the fact it operates in a dying industry are enough to make J.C. Penney a great short. Retail stocks need positive comps and sales to sustain their business in the long run, and given J.C. Penney's recent downtrend, I think any eccentric upward movement should be used by investors to initiate a short position.

Conclusion

J.C. Penney has been actively cutting costs to boost earnings, but these initiatives are just delaying its inevitable bankruptcy. Since the physical retail business is dying, with no signs of recovery, it is highly likely the company will continue heading lower.

With sales consistently declining and J.C. Penney's debt looking worse with each passing day, I do not think anyone can make a reasonable case to own the stock for the long run. In fact, as mentioned, the chances of the retailer going bust are very high. As a result, I think investors should consider shorting the stock.

Disclosure: No position.

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This article first appeared on GuruFocus.