//The Ratings Game: J.C. Penney to close three stores, foreshadows further closures

The Ratings Game: J.C. Penney to close three stores, foreshadows further closures

Reuters

One analyst says if J.C. Penney doesn’t fix its fashion problem, it will remain in a “death spiral.”

J.C. Penney Co. Inc. said in its holiday sales update that it will start the process of closing three stores in the spring, and more locations may shutter.

The three closures are “part of an ongoing evaluation of [the] store portfolio occurring over the next few months,” the announcement said. That review will analyze which stores “may not” be reaching required financial targets or present a chance to capitalize on a real-estate asset opportunity.

J.C. Penney

JCP, +10.74%

  will report its fourth-quarter results on Feb. 28.

“Cowen anticipates J.C. Penney will need to ultimately close up to 125 doors or -15% of its physical fleet,” wrote Cowen in a post-update note. “We do acknowledge a majority of J.C. Penney’s stores likely generate positive Ebitda [earnings before interest, tax, depreciation and amortization]; therefore, management will need to consider strategies to offset lost Ebitda with recapture programs, strategic initiatives, and cost-saving programs.”

Cowen rates J.C. Penney shares market perform with a $2 price target.

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The struggling retailer also reported a 3.5% same-store sales decline for the nine weeks ending Jan. 5. Without the impact of a calendar shift, the same-store sales decline was 5.4%.

For the fourth quarter, FactSet is guiding for a 3.9% same-store sales decline.

“Worryingly, the pace of decline remains the same as that posted during the third quarter, even though there was significant momentum in consumer spending across both Black Friday and Christmas,” wrote Neil Saunders, managing director at GlobalData Retail, commenting on the 5.4% decline.

Saunders thinks the retailer’s biggest problem is apparel, which drives traffic. Shortfalls there lead to shortfalls in other categories like home and electronics.

“In essence, unless the issues in clothing are corrected, J.C. Penney will remain in a death spiral,” Saunders wrote.

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And the heightened focus on toys for the holidays, shared by retailers like Amazon.com Inc.

AMZN, +0.17%

  and Walmart Inc.

WMT, -0.33%

  given the absence of Toys ‘R’ Us, only produced a “lackluster” result, GlobalData said.

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“Despite very good liquidity, J.C. Penney’s sales performance remained challenged during holiday 2018 as it reduced inventory levels,” said Christina Boni, Moody’s department store analyst. “Additional store rationalization at J.C. Penney is still under evaluation and has the potential to fuel further shrinkage for the department store industry in 2019.”

Both GlobalData and Cowen find a silver lining in the J.C. Penney announcements of positive cash flow and reduced inventory.

“J.C. Penney’s initiatives have been unsuccessful in driving same-store sales amid a robust consumer backdrop as competitors have outperformed with the company admitting it has lost its core consumer behind peers in key categories such as e-commerce and athletics,” wrote J.P. Morgan analysts.

In addition, clearing inventory will apply margin pressure “on top of continued headwinds from appliances and e-commerce.”

J.P. Morgan rates J.C. Penney shares underweight.

J.C. Penney shares jumped 10.7% in Wednesday trading, but have plummeted 64.2% over the past 12 months. The SPDR S&P Retail ETF

XRT, +0.84%

  has slipped 3.3% in the past year and the S&P 500 index

SPX, +0.41%

  is down 6.1% for the period.