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J.C. Penney And Sears: More Museum Than Store

Feb. 06, 2013 1:32 AM ETCOST, HD, SHLDQ, WMT, CPPRQ28 Comments
Stephen Rosenman profile picture
Stephen Rosenman

How can you predict which brick-and-mortar retailers are worth investing in and which should be avoided? It's a tough group. They not only have formidable store-front rivals but face strong on-line competition as well. Yet, some brick-and-mortars have thrived: Home Depot (HD) is up 47% while Walmart (WMT), and Costco (COST) have climbed over 12%, 17% and 20% respectively in a year. In contrast, two others - Sears (SHLD) and J.C. Penney (JCP) - have been miserable for shareholders.

I've used the metric "Days In Inventory" to successfully predict a retailer's future share price. In fact, I correctly forecast the fate of these five retailers' share prices a year later. Five out of five isn't bad. That's testament to the power of this metric.

To refresh: Days In Inventory measures the length of time it takes a company to move its goods.

Days In Inventory = Inventory/Cost of goods x 365 days

The thesis: In retail, it's the kiss of death to have inventory linger on the floors. The longer a company holds its inventory, the longer its cash is tied up. Worse, retailers are often forced to mark down their goods to unload excessive inventory. When you are competing against a strong on-line retailer like Amazon (AMZN), high Days In Inventory is a recipe for disaster.

But really, does it work?

In the words of the late great Louis Rukeyser: "You betcha!"

Last year, I predicted that Sears and J.C. Penney would get slaughtered while Costco, Walmart, and Home Depot would thrive. Why? Because Sears and J.C. Penney had much higher Days of Inventory than Costco, Walmart and Home Depot.

Per that article:

Make no mistake: Sears and J.C. Penney act more like museums than retailers. They've become simply corridors to get to the rest of the mall. The tip off: The two can't

This article was written by

Stephen Rosenman profile picture
Stephen Rosenman enjoys analyzing the financial health of companies and pointing out areas the market is either not recognizing or ignoring. A long time investor, I put my money where my mouth is. That's why I'm passionate about my positions. I trumpet companies I believe in and back my articles up with data and graphs. Every now and then, I'll write something a little goofy to lighten it up...

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