J.C. Penney's (JCP) climb back to relevance just got steeper.
A sector report released early Monday morning reflects disappointing September retail sales growth of just 0.1% against an analyst consensus of 0.6%, marking a second straight month of missed estimates.
Someone give me something good to say about today's US Retail Sales numbers, other than the rebound in the otherwise moribund auto sector. Core is awful at -0.1% M/M with downward revision for August from +0.3% to +0.2%. Core less gas is just flat. And don't say "control group."
— Dan Alpert (@DanielAlpert) October 15, 2018
Clothing retailers like J.C. Penney have been feeling the pain as of late, as a decline of 2.82% in August was hardly helped by a modest 0.5% increase in September. As the runt of retail at the moment, and with the news of Sears Holdings (SHLD) bankruptcy, these sales numbers certainly do not help J.C. Penney's comeback chances.
J.C. Penney stock sank 4.2% shortly after market open even as market share being left behind by Sears opens an opportunity.
Startling Slowdown
The strong economy this year has been a nice tailwind for many retailer stocks, as names like Action Alerts PLUS holding Kohl's (KSS) and Target (TGT) have enjoyed over 30% gains in 2018.
Unfortunately for J.C. Penney shareholders, the over 100-year old retailer has not been helped along by the same tailwind. Instead, JCP's second-quarter sales decreased by 7.5% to $2.8 billion, $400 million less than Sears' latest figures.
As a trade war pressures margins on the already tightened retailer and a softening of retail demand takes a toll, the macro environment may become more of a headwind than a tailwind moving forward.
Nevertheless, ING Groep Chief International Economist James Knightley blamed the retail numbers largely on natural disasters like Hurricane Florence and stated his belief that the U.S. consumer remains a strong indicator of a bull case for retailers.
"Further distortions are possible in the next release due to Hurricane Michael, but in general, the rebuild/clean-up operation tends to lead to a bounce in retail sales over subsequent months," he wrote in a report on the release. "In any case, the outlook for retail sales remains encouraging with the strong jobs market and this year's tax cuts giving households plenty of cash to spend."
He added that continued wage growth could offer a bright spot for retailers as well.
Newly named J.C. Penney CEO Jill Soltau will seek to prove her company can capitalize on the tailwinds that remain in order to spark the turnaround she's been brought on to lead.
e-Commerce Elevates Elusive Comeback Climb
Yet, some tailwinds for the overall sector actually present a problem for J.C. Penney, namely e-commerce.
The e-commerce boom has been steadily growing for years and offers a company like Amazon (AMZN) a better chance to seize on customers moving away from Sears.
Soft September #Retail sales @EllesEconomy that miss expectations even as digital shopping (part of our Digital Lifestyle #investing theme) crushed it up more than 11% year over year. Consumers dealing with the >11% increase in gas prices YoY $AMZN $WMT $UPS $COST
— Chris Versace (@ChrisJVersace) October 15, 2018
"eCommerce and electronics [could] gradually represent a greater percentage of sales and drive a much greater gross margin headwind than we anticipate," Morgan Stanley's Kimberly Greenberger wrote in her downside risk analysis for J.C. Penney.
She set a $1.50 price target and an "equal-weight" rating for the company on the back of the risk from e-commerce to the overall department store industry already marred by "declining investor sentiment."
