The Daily Dose: Out of Control

 | Jan 16, 2014 | 12:30 PM EST
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The more I try to take a breather from analyzing J.C. Penney (JCP) and Sears (SHLD), the more each struggling entity sucks me back in!  My firm is out this morning with a reiterated sell rating on J.C. Penney shares (sorry, can't share report unless a client, we are part of consensus now). At 3:30 p.m. or so I will be on Fox Business to share some new, disturbing findings on the company. In the meantime, here are the must-know takeaways from your resident Honest Abe financial analyst:

Store closures are good for the future...

... But the market thinks these store closures were a result of a weaker than expected margin holidays...

... That ultimately ratchets up the fear on J.C. Penney for the first quarter of 2014...

... J.C. Penney can ill afford any further disastrous quarters, it must begin to show the Street a clearing path to profits....

 If it doesn't, the company won't survive to benefit financially from 33 store closures.

Source: Belus Capital Advisors

On a personal note, the timing of the J.C. Penney news is all too coincidental to me, chatted with the company very briefly Wednesday morning and tweeted we would have a new note out today.  Odd, but anyway, of the earnings reports that have trickled in thus far, including Bank of America, Alcoa, Wells Fargo, and JP Morgan, I view Fastenal's (FAST) as the most worrying.  Why?  Well, portfolios entered 2014 overweight industrials and tech, and Fastenal could be considered the former.  Here is what bothered me with the company's report:

Operating margins: "flat" in the quarter.  The market is banking on earnings acceleration to power stocks higher in 2014. This is an initial, although minor, hint that the consensus thesis is flawed.

Expectations: "gross margins continued to weaken" after management guided negatively in mid-December.  So, the business itself is not stable enough to forecast. Projecting the worst isn't even working!

Wide ranges: gross margins were guided to between 51% and 53%, but the end result was outside the range.  Companies issue wide sales and profit ranges so they could at least fall somewhere in between them and not upset the Street.

New products: when new products are yawned at as Fastenal suggested, that equates to a poor ROI.

Markets: sales in mature markets (stores open over three years) softened quarter over quarter, a great indication of true demand.

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