J.C. Penney: A Random Walk

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 |  About: J.C. Penney Company Inc. (JCP), Includes: AMZN, ROST, TJX
by: Stock Traders Daily

By Neal Rau

It's back to school season again, which is retail's second-most important selling period next to Christmas. Retailers like J.C. Penney Company, Inc. (JCP) who has seen its stock drop more than 43% in the last year, are going to be watched closely by investors. After a drop like that it might seem that JCP is a buy, but the report at Stock Traders Daily offers a warning. Before you try to catch a falling knife like JCP, you better do your homework. A random walk I took recently provides some insight.

This weekend I walked past JCP at the mall, I couldn't help but think about all the negative news that the company has received recently and noticed the store was pretty empty. The signs were advertising a "back to school" sale, so I walked in to see what they were selling. The prices were low but most of the brands were generic names like "Arizona" or "Champion". Hardly brands that are popular with kids or anybody else for that matter. I remember back to school shopping when I was a kid; it was about getting clothes that were popular brands and convincing my parents to pay for them.

So if you're looking for better brands and a discount where do you go? TJ Max (NYSE:TJX) and Marshalls were the first stores to come to mind, so I checked out a TJ Max store on the way home. The store was packed and full of people buying 4-5 items of clothing or more. The prices are cheaper than JCP sale prices and with a much better selection of popular brands. Customers were busy searching for that great deal that you have to dig for. JCP has reported a huge decline in sales this year, and it sure looks like The TJX Companies, Inc. TJ Max and Marshall's stores are benefiting from their loss. The stock has the potential to run into earnings when they report next week if it can break above long term resistance.

Ross Stores, Inc. (ROST) is another discount retailer sure to appeal to families on a tighter budget this year. One negative thing about ROST and TJX stores has been they don't have a web site where you can look to see what they have in stock before you drive down to the store. TJX just announced they are planning to change that this year when they launch their new website. They are investing in software that manages inventory, tracks it in real time, and continuously updates the websites. CEO Carol Meyrowitz said more than a year ago that "ecommerce is clearly in our future." This will be the second attempt at ecommerce after a 2005 failure. The company shut down their website after only a year following poor sales. That failure cost the company $15 million. In 2011, the company hired Elaine Boltz, a leading e-commerce executive. Last year, it spent about $200 million to buy online retailer Sierra Trading for its technology and expertise. The potential revenue is huge for ecommerce and they don't have to worry about Amazon.com, Inc. (AMZN) as much as other retailers because only 17% of T.J. Maxx products overlap with Amazon, compared with a staggering 46% for the average retailer.

The company is also targeting men as they expand their Men's clothing, which currently makes up only about 10% of their inventory. TJX should also be able to leverage its recent purchase of off-price retailer Sierra Trading Post. TJX is also seeing solid performance in Europe and North America. Sales have grown in the European region over the last two years from 11% in fiscal 2011 to 13% in fiscal 2012. The retailer is also planning to increase its store count to 3,200 by fiscal 2014, with plans to expand its Homegoods stores to 825 from 750 stores. While other retailers are struggling in several countries in the European region, TJX is actually seeing increased sales and an increased store count.

The biggest benefactors of the recent struggles of J.C. Penney should be the off-price retailers.TJX releases its second quarter Fiscal 2014 sales and earnings results on Tuesday, August 20, 2013. The stock is up about 21% this year and near the 52 wk high. We have TJX strong near-term, but the stock is in play because it is testing long-term resistance; if resistance holds the stock could reverse all the way to longer term support. On the other hand, if the stock can break above resistance going into earnings it might provide a good short term trading opportunity. Some of the business taken from JCP might be built into the stock already but the potential addition of ecommerce revenues and the expansion in Europe and into Men's apparel could provide bullish guidance to move the stock higher.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: By Neal Rau for Stock Traders Daily and neither receives compensation from the publically traded companies mentioned herein for writing this article.