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A version of this article appeared on our website November 20, 2013. This article is for educational purposes only and does not reflect our current opinion on J.C. Penney. Please view the firm’s 16-page report for our updated take on the firm. J.C. Penney’s (JCP) third-quarter 2013 results, released November 20, left much to be desired, despite the market’s positive reaction. In fact, the performance confirmed our greatest fear, and we are maintaining our significantly below-market fair value estimate of the firm. Investors should be cognizant, however, that we don’t expect a path directly to our below-market fair value estimate of J.C. Penney’s stock, but one that has fits and starts before an inevitable decline takes hold over the next couple years. … Read more

A Schedule 13D filed by Sears (SHLD) Monday showed that CEO Eddie Lampert had cut his equity stake in the beleaguered retailer to 48.5% from a prior 55.4%. Certainly this is not reassuring the markets as recent channel checks showed further deterioration in the company’s comparable store sales trends during November. Sears is struggling to remain relevant in today’s retail environment, and Lampert’s recent selling isn’t sitting well with us about the retailer’s sustainability as an entity. The firm’s third-quarter results were atrocious, and the holiday shopping season appears to be shaping up as equally poor for Sears. J.C. Penney (JCP) made headlines Tuesday on what initially seemed to be positive news: the company’s comparable store sales grew more than … Read more

On Wednesday, Macy’s (M) reported excellent third-quarter results. Comparable store sales leapt 3.5% in the quarter, while quarterly earnings jumped 31%, to $0.47 per share. Macy’s continues to execute in its key strategies—My Macy’s localization initiative (which launched across the nation in 2009), Omnichannel integration and Magic Selling (which requires a more rigorous training for new sales associates)—and noted that it saw improvement in the sales trend in every region of the country. Operating income advanced 10.8% from the same period a year ago, as the firm’s operating margin improved to 5.7% from 5.4%. Net cash from operating activities was $819 million and capital spending was $381 million, resulting in free cash flow of $438 million in the period, or … Read more

With sales declining precipitously and bankruptcy looking like a real possibility, we have materially lowered our equity fair value estimate on retailer J.C. Penney (click ticker for report: ) to $3 per share. The firm now scores a 1 on the Valuentum Buying Index, and we’re avoiding shares at all costs in the portfolio of our Best Ideas Newsletter. Why Now? We haven’t liked J.C. Penney since former CEO Ron Johnson’s plan showed signs it clearly wasn’t working, and we have consistently maintained that Penney’s business model was obsolete and doomed to fail over the long term, even before Johnson made changes. Still, earlier this year, the firm improved its liquidity position when it raised over $2 billion in cash via debt with an interest … Read more

Our fundamental view on the department store industry hasn’t changed much after the second quarter. Kohl’s sales gains were surprising, but if we look at the two-year trend of stacked comps (last year’s quarter plus this year’s quarter), Nordstrom continues to easily outperform its peers. Source: Valuentum Ultimately, we believe improving margins in the department store industry will be difficult. Even if a firm is able to gain some additional gross margin, investments in technology will likely increase capital spending. Overall, we view the cohort as fairly valued. Fundamentally, we think Macy’s will continue to outperform Kohl’s due to its superior online shopping experience, but Nordstrom appears to have the most growth opportunities as it looks to expand on the … Read more