I called this short back in October. On Thursday J.C. Penney (JCP) reported a third quarter of continued sales declines and broadening losses. I think at one point I saw that shares were down 12% pre-market. But the stock rallied and is up 14% to $1.39 as of 3:45 p.m. ET. JCP faces some pretty serious problems and I see nothing in the third-quarter results that helped change that reality. If anything, the situation has deteriorated even more. There's no reason to own JCP when you can get better performing rivals like Macy's (M) or Kohl's (KSS) .
The problems are pretty clear cut. Revenues declined 5.3% year over year to $2.73 billion. For the first nine months of the year, net sales are down 5.9%. If you adjust for the extra week in 2017's results, comparable sales declined 4.5% year over year. In terms of revenue streams, the only bright spot for JCP was a strong 15.9% improvement in credit income. Unfortunately $80 million in credit will not offset the losses in sales.
J.C. Penney didn't do nearly enough in terms of reactionary cuts to expenses to offset the decline and this led to even bigger operating losses. Total operating losses were $100 million versus $78 million last year. Net losses would have been much worse if not for a 72% decrease in taxes. The retailer lost $151 million in the third quarter. On a diluted share basis, that's $0.48 per share, 20.8% worse than last year's loss of $0.40 per share.
There's honestly nothing nice to say about these earnings. It's crunch time for JCP and they're not getting it done. As the losses mount, the company continues to rely on financing in order to keep operations moving. Long-term debt of $4.16 billion is up roughly 3% compared to the same period last year. That in itself doesn't seem like much, but when you compare it to the second quarter of 2018 it's very concerning. JCP actually had its long-term debt down to $3.96 billion at the end of Q2'18. This showcases the problem facing JCP. They aren't making any money and therefore must borrow to keep going. Even if they pay some off, they end up borrowing again to keep their capital stable. When you have current maturities of long-term debt of $92 million in the third quarter (an admittedly smaller number than last year), it makes it very hard to innovate. When you have losses quarterly, you take on liabilities to cover the losses; rather than taking on liabilities to invest in revamping the business. It's a similar situation to that faced by Sears and we all know how that ended.
There's way too much riding on the holiday season to be involved with JCP. This stock has lost more than half of its value year to date and there wasn't much value to begin with. The only play I could see is a long-term put option. I expect the stock behavior of JCP to be very similar to how Sears traded as it pushed toward $1. To that end, marginally good or bad news should send the share pricing in all manner of directions. If there they come close to "flat" sales or earnings in the fourth quarter, this stock could rally simply on emotion. Similarly, if a name like Macy's does well in the fourth quarter, JCP stock could climb sporadically. That opportunity could open doors for acquiring some cheap 2020 put options. If you have the patience to watch the retailer crumble, that might be a profitable play. It's certainly something I'm considering. To those more risk averse, I say avoid the name all together.
Why bother with something like this when you can get the dividend of Macy's? Their sales actually gained in their Q3 results. If you want exposure to brick and mortar retail, why not just look at Kohl's? At least there you have profitability and a 3.3% dividend. Unless you're with the shorts, J.C. Penney just isn't a stock for smart investors anymore.
