With shares of troubled retailer J.C. Penney (JCP) falling to a 30-year low, comparisons to consumer electronics retailer Best Buy (BBY) seem to be bountiful. Best Buy, after falling to $11.20 per share last December, has nearly quadrupled since then as a turnaround effort is taking shape. I own shares of Best Buy, some of which I bought near that low, and I recently wrote an article arguing that Best Buy is worth at least $50 per share.
But is J.C. Penney really the next Best Buy? It would appear that the stories are very similar. Both are troubled retailers left for dead by the market. Both are engaged in serious turnaround efforts. But Best Buy had some advantages that J.C. Penney does not have, and in fact the two situations are very different.
Best Buy is unique - J.C. Penney is not
After Circuit City went under a few years back, Best Buy was left as the only nationwide consumer electronics chain left. Now, stores like Wal-Mart (WMT) and Target (TGT) sell electronics as well, but Best Buy focused exclusively on the consumer electronics market. Say what you will about customer service at Best Buy, but expecting Wal-Mart or Target to supply genuinely knowledgeable staff is hopeful at best. Best Buy caters to a large group of people who know little about technology and gadgets, and this gives them an edge over other big-box stores.
J.C. Penney, on the other hand, is a department store. Just like Kohl's (KSS), Macy's (M) or a slew of other companies which all sell essentially the same thing. There is very little uniqueness, and getting customers to come back after the Ron Johnson debacle will be extremely difficult. J.C. Penney has a recognizable brand, but it's unclear exactly how tarnished it has become.
Best Buy was never unprofitable - J.C. Penney is hemorrhaging cash
While net income at Best Buy did turn negative in 2012, this was due to various write-offs and restructuring charges. Real cash earnings never turned negative. The turnaround was started from a base of profitability, a fact that gave the new management the ability to invest in initiatives to increase sales and to improve competitiveness. This increased the chance of success significantly.
J.C. Penney, by any measure, is burning through cash at an alarming rate. The net loss for the first two fiscal quarters is over $900 million, and the TTM free cash flow is a very negative $2 billion. With the recent share offering, the company likely has about two years before it runs out of money. And there is little indication that things are improving at a meaningful pace.
Best Buy has manageable debt levels - J.C. Penney does not
Last quarter Best Buy has paid about $26 million in interest payments, or $104 million annualized. J.C. Penney paid $95 million, or $380 million annualized. Best Buy sells around $45 billion of product per year, needing just a 0.23% operating margin to cover the interest. J.C. Penney, on $12 billion of annual revenue, needs an operating margin of 3.16% just to cover the interest.
This is a scary number. Now, if the company can get revenue back to 2011-levels, then this necessary operating margin decreases substantially. But this is a big if, and with only two years or so before the company completely runs out of cash, I don't think there's enough time.
J.C. Penney is not the next Best Buy. Eventual bankruptcy is a very real possibility. There is, of course, a chance that the company can recover, but it seems increasingly unlikely with each passing day. The price would have to be outrageously low to consider the stock, and even just under $7 per share is too expensive. If it gets down in the $3 range, I might take another look, but there is very little reason to believe that the J.C. Penney of yesteryear will make a return.