Is J.C. Penney Company, Inc. (NYSE:JCP) staring at a turnaround or bankruptcy?
J.C. Penney has recorded wild deviation in its stock value in recent times. The investors are bemused with the frequent fluctuations over the past few months. Although the stock is down by an overall 6 percent, it is in a far better place when compared to the 50 percent freefall recorded at one point. Since touching the rock bottom in February, the stock value doubled to reach the $9/share level and was the strongest performer in the market. But, it again fell to $7/share as the high was violently rejected.
Are we going to see another rejection or the stock is going to break out ahead?
The company has pocketed a small amount of net profit in the recent quarter, but shareholders have incurred huge losses over a period of time. JCP is under tremendous pressure from the markets. The stock has lost its sheen and is down by 50 percent in the last one year, and three-fourths of the stock value degraded in the past five years. This happened in spite of the broader stock market and especially in retail stocks. The company accumulated debts, and its real estate is under collateral. It had to dilute investors in a corrective action last year.
However, the investors still did not lose faith in the stock. They believe a turnaround is likely, and the company's latest moves are an indication of a rebound. Although the corrective actions have started late, it is encouraging for the markets that the management is working on cost cutting and it has shut down locations that do not have economic feasibility. The company's actions have sent a positive signal to the markets and also helped in avoiding a possible bankruptcy, thus, giving a second chance to it.
The company still faces several challenges, and losses will continue in future, and these include the huge costs incurred while shutting down economically unfavorable locations. The near bankruptcy situation does not make the stock worth buying. We can experience short sellers rushing to sell off their shares if $9/share is breached. But this should just be a temporary phase. Currently, it is experiencing huge resistance at $9/share, and a breach is unlikely in the near future.
The fluctuations in the retail space in the U.S. are not favorable to the company's performance. J.C. Penney's target demographic consists of middle class American consumers. Despite the fact that stock markets touched a recent all-time high, the consumers are still grappling with economic issues and lack of money to spend. Essential goods such as gasoline and food have seen a steep rise, causing a major hole in consumer's pocket. There is less money left to spend on anything else. While the employment rate is good as per the Bureau of Labor Statistics, it does not cover the whole picture. The sub-par jobs only provide for making ends meet. People are not having money to spend at retail outlets like J.C. Penney.
Strong players in the U.S. market like Home Depot (NYSE:HD), Wal-Mart (NYSE:WMT) and Panera (NASDAQ:PNRA) have been reporting erosion in the profit margins due to the weak economy. The signals are out rightly negative. Struggling retailers do not stand a chance of improvement in the current environment.
J.C. Penney is a survivor. It has been proactive through its actions. It is closing down all the less profitable locations, selling off real estate holdings and fighting with the stronger players to capture the sale. It might breach the $9/share mark in the near future, but the future doesn't look very bright, to say the least. The retail space looks saturated and weak in the current environment. At best, J.C. Penney will stave off bankruptcy. But the profit margins do not look favorable.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.