George Soros, J.C. Penney Company, Inc. (JCP)’s Loans: Neither Can Keep Shares From Failing

Compared to the competition, J.C. Penney is in for a world of hurt. Macy’s, Inc. (NYSE:M), one of its strongest competitors, trades at a big discount to the market despite its strength.

Macy’s, Inc. (NYSE:M) market share grew to 15% in 2012, much of which likely came from the decline in J.C. Penney’s same-store sales. The two rivals both sell branded clothing.

Macy’s, Inc. (NYSE:M) also has a track record for impressive cash-flow generation (more than $1 billion per year since 2009), and its BBB-debt ratings allow it to borrow to fund share repurchases. J.C. Penney Company, Inc. (NYSE:JCP) can barely borrow against its real estate assets just to buy more time. Furthermore, Macy’s has the balance sheet to survive a price war. The company can tolerate lower margins to steal share and drive competitors to the brink of bankruptcy.

A compelling valuation at less than 10 times forward earnings and 13 times free cash flow makes Macy’s a much better play on the same customer.

Why play turnaround when you can play strength?

The next question for investors is why? Why position yourself in a retailer in a competitive industry that might turnaround its slumping business model when two competitors sell so cheaply?

The department store business is in a material, terminal decline. Department store revenue fell by more than 20% through the 2000s. This trend will certainly take a bite out of J.C. Penney before it touches profitable and cash-flow positive Macy’s.

A real estate-driven thesis for J.C. Penney is slowly losing credit as other department stores liquidate money-losing locations. Sears’ exit from department stores would have the greatest impact on J.C. Penney’s-owned real estate comps.

Sell the laggard and buy the winner in this highly-competitive industry. J.C. Penney Company, Inc. (NYSE:JCP)’s first quarter sales figures suggest it has forever lost its customer base. Those customers are happy Macy’s customers, and at 10 times forward earnings and 13 times very routine cash flow generation, Macy’s is a much better wager.

The article Neither J.C. Penney’s Loans nor Soros Can Keep It From Failing originally appeared on Fool.com and is written by Jordan Wathen.

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