Thursday, November 15, 2018

Overconfidence Stings JCPenney, Department Stores

When a close competitor fails, it is good news and bad news. The good news is that you might be able to pick up some of the customers. The bad news is that you too might fail from the same market forces.

Department stores that see the expected liquidation of Sears and Kmart as good news are missing the bigger picture. It is not just that department stores collectively will lose customer visits to Sears and Kmart during store closing sales. The whole department store concept is in decline. The mall concept is in decline. The question at this point is not how to stem the decline, but how to best manage it.

Target, JCPenney, and Macy’s have been the most overconfident in reacting to the decline at Sears and Kmart. The folly in this view was brought home with the new report from JCPenney, which saw a staggering decline in sales in the third quarter, down 5.4 percent. Inventory overhang continues to be a major concern — also down 5.4 percent, but that means inventory remains just as bloated as before when seen in proportion to revenue. A few quarters had looked promising at JCPenney with actual gains, however minimal, in same-store sales. This plateau may, in retrospect, be seen as an accidental result of the whims of popular culture in an otherwise directionless company. The stock hit an all-time low after the report and faces the risk of being delisted if things do not turn around in the next few months.

When comparing JCPenney to Sears, it is important to note that JCPenney is doing worse than Sears by most measures. Most importantly, the Sears brand still stands for something. JCPenney has changed direction so many times in the last quarter century, it no longer has a brand identity. The only reason JCPenney looks better at this point is that Sears went into bankruptcy.

If Sears and Kmart are suffering from inventories that are too thin, department stores in general will suffer from the overblown inventories of the overly optimistic stores. Those items will have to be discounted as soon as December arrives, putting pressure on every department store. The price pressure will be that much more intense if all Sears and Kmart stores are in liquidation by then.