Sugarcoating Press Releases Won't Save J.C. Penney From Bankruptcy

Despite Michael Kors (KORS) highlighting its negative stance on the brick and mortar retail environment yesterday, shares of J.C. Penney (JCP) rallied considerably. Michael Kors reported a great quarter and over the conference call. The company’s CEO John Idol said, “We believe that the North America retail environment remains highly promotional, which is impacting the long-term brand equity of Michael Kors."

Despite the bearish stance, shares of J.C. Penney rallied 7.5% yesterday.
While the rally is unexplainable, I think investors should use it to short the stock as J.C. Penney is still in a lot of trouble. Not only is the weakening retail sales environment a negative headwind for J.C. Penney, the company’s huge debt burden is also a deal breaker for potential longs.

J.C. Penney manipulates its press conferences to make it sound positive and give the impression that its turnaround is on track. For instance, J.C. Penney focuses on EBITDA growth instead of profits. For a company that has a debt of over $4.5 billion, it is obvious why it would want to exclude the interest expenses from its quarterly results.

In most cases, when a company boasts about its EBIDTA growth, there is something fishy. A company avoiding EPS and focusing on EBITDA should be considered a red flag and that is exactly what J.C. Penney is doing.

The company doesn’t highlight several important metrics like falling comps and overall sales, declines in traffic, declining margins, etc. In addition, J.C. Penney has also been slashing costs by laying off employees, which further points to the fact that the company’s turnaround is still way off track.

To make matters worse, J.C. Penney’s inventory also grew 4% in the latest reported quarter. Growing inventory amid the weak sales environment can brutally hurt J.C. Penney in the near term. Brick and mortar retailers will continue facing pressure as online retailers are eating their lunch. As a result, I don’t see how J.C. Penney’s management can dream of a turnaround just yet.

Conclusion

J.C. Penney’s turnaround is still way, way off track. The retailer’s debt and the overall slowdown in the in-store shopping space will push the stock lower. Investors should use yesterday’s rally to short the stock as J.C. Penney is headed a lot lower.

Investors shouldn’t be fooled by the company sugarcoating its press releases and should at least stay away from the stock, if not short it.

 
Published on Jun 3, 2016
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

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