Kohl’s Corporation (KSS), Macy’s, Inc. (M): J.C. Penney Company, Inc. (JCP) Is Turning Itself Around, but Stiff Headwinds Exist

J.C. Penney Company, Inc. (NYSE:JCP) is one of the most hotly debated stocks on Wall Street. The bullish argument is that customers are slowly returning to J.C. Penney Company, Inc. (NYSE:JCP) stores and CEO Mike Ullman has the company headed in the right direction. The bearish argument is that too much damage has been done, the brand has been tarnished, and a sustainable recovery is a near impossibility. After looking at some key numbers and trends, the answer seems to be somewhere in the middle.

Recent Results
In the second quarter, net sales came in at $2.66 billion, moderately lower than the $3.02 billion delivered in the year-ago quarter. Comps declined 11.9% year over year, mostly due to failed merchandising and promotions, markdowns, renovations, and an ineffective remerchandising of the Home department. The bears would be smiling right about now, but a positive trend also exists.

For instance, comps increased 470 basis points sequentially, and overall sales improved in each month of the second quarter. J.C. Penney Company, Inc. (NYSE:JCP) expects this trend to continue in the second half. Therefore, it’s possible that CEO Mike Ullman’s fixes are in motion.

Industry Trends
Retailers and consumers go hand in hand. If the consumer is weak, then there’s little hope for most retailers. J.C. Penney Company, Inc. (NYSE:JCP) could limit the damage with promotions, which may attract value-conscious consumers, but industry trends are still more powerful than any promotion. Currently, there are several issues to worry about.

The housing market plays a big role in consumer confidence. When housing prices appreciate, homeowners feel wealthier and they spend more. Housing prices only appreciate when demand is high. Over the past few years, extremely low supply and historically low mortgage rates have driven demand higher. Currently, however, the 30-year fixed mortgage rate stands at 4.69%, considerably higher than the 3.53% rate in January. As mortgage rates continue to creep higher, fewer people purchase homes, and home prices retreat. This, in turn, leads to a weaker consumer, a headwind for J.C. Penney Company, Inc. (NYSE:JCP) and retail in general.

Then there’s underemployment. The economy added 169,000 jobs in August, and the unemployment rate fell to 7.3%. However, what most people don’t pay attention to is that the July number for jobs added was revised down to 104,000 versus the original report of 162,000. And, as you might already know, labor force participation continues to decline. Once again, this will negatively impact the consumer, which will then limit potential for J.C. Penney Company, Inc. (NYSE:JCP). In addition to these headwinds, consumers must contend with high gas prices and a 2% increase in the payroll tax.

J.C. Penney vs. Peers
Given these headwinds, let’s see how J.C. Penney stacks up against its peers.

J.C. Penney is like Kohl’s Corporation (NYSE:KSS) in that it offers a broad array of brands and products at discounted prices. However, J.C. Penney is more often brought up in conversation with Macy’s, Inc. (NYSE:M), which had been a Wall Street darling up until about one month ago.