Saul Martinez/Bloomberg
Common wisdom says that if you can’t stand the heat, get out of the kitchen.
J.C. Penney (ticker: JCP) shares have been taking plenty of heat, but the retailer is staying put by the stove and trying to bring shoppers in, as well. More than 500 stores now sell refrigerators, ranges and dishwashers, in addition to washers and dryers.
A current online promotion offers a no-interest loan through the store’s branded credit cards on major-appliance purchases of $499 or more.
Yet investors have been giving Penney no credit for what it has accomplished in the last year under Chief Executive and Chairman Marvin Ellison. In late February, Penney announced its first annual profit since 2010 and the closures of underperforming stores. Usually announcements like this go over like free wings at happy hour. Instead, the shares fell 6% that day.
Similarly, a recent credit upgrade also sent the stock skidding.
Shares are down 30% year-to-date through Tuesday and at sub-$6, the stock is trading at its lowest points since Penney stopped paying a dividend in the first half of 2012.
Maybe retail investors are so predisposed to hearing bad news they’re tone-deaf. Or maybe the market is selling on good news to dodge the next company-specific misstep made by Penney.
The last time we checked in with Penney, we focused on Ellison’s Aug. 25 purchase of 50,000 shares on the open market. At the time of our story, those shares had slipped 1.1%; they are now down 42% through Tuesday’s close.
Even more troubling, Ellison was granted 350,000 options that vested March 3, but the $10.84 exercise price is nearly twice what the stock is trading at now.
Penney’s top shareholder, BlackRock (BLK), thinks there’s more in store. In fact, BlackRock has increased its holdings to 23.3 million Penney shares, or a 7.6% stake, as of Dec. 31, up from 20.9 million shares, or 6.8%, a year ago.
BlackRock, the world’s largest money manager, certainly has some winning financial recipes, but right now seems to be a bad time for Penney to be selling appliances. Just this month Hhgregg filed for bankruptcy protection and fellow mauled mall stalwartSears Holdings (SHLD) rattled the market (or not) with doubt about its viability as an ongoing concern.
In July, the Wall Street Journal reported that U.S. homeownership—essentially the total available market for appliance sales—hit a 50-year low.
Among appliance makers, Whirlpool ’s (WHR) North American margins have been hammered and the company contends that Samsung Electronics and LG Electronicsare selling washers at artificially low prices in the U.S. Penney is pushing both South Korean brands in its stores, and it has a partnership with Samsung for smart-home services.
Speaking of bad timing, Penney’s zero-interest promotion could prove costly to the company as rates rise.
Also, Nike (NKE) announced poor-quality fiscal third-quarter earnings and a disappointing outlook, which could bench growth of just-unveiled Nike shops in Penney stores.
Penney is pursuing with Nike a formula that had been working with its store-within-a-store concept for Sephora.
Sephora, a unit of LVMH Moet Hennessy Louis Vuitton (LVMHF), is in more than 590 Penney stores in a partnership that dates to 2006. In the last five quarters, Sephora has been Penney’s only consistent top-performing division, in either first or second place.
In a recent appearance on CNBC, CEO Ellison noted that 70% of Penney shoppers are women. “We are a predominantly female-driven business,” he said. “We have a female demographic.”
Ellison also declared that Penney was de-emphasizing dependence on women’s apparel, which was the largest division (24% of its retail mix in 2016) but not a top performer in the last five quarters. But a casual observer may think that the retailer should try to be less dependent on Sephora.
Sephora is only a small part of Penney’s overall presence (it is included under the women’s accessories umbrella, which itself is tied for third place among divisions with 13% of the retail mix in 2016) but as stated earlier, outperforms. Sephora accounted for the highest sales increases at Penney’s in 2015 and 2016. Sephora helps “drive traffic and increase the frequency of visits to our stores,” Penney said in a regulatory filing.
Penney plans to open 70 new Sephora locations while expanding some current ones. But what if Sephora plans to do the same?
Sephora has been “on a tear” as it opens more stand-alone stores. In fact, its shelves have become valued real estate to high-end cosmetics brands as department stores shutter.
Sephora operates about 2,300 of its own stores in 33 countries, including 430 stores across the Americas. It saw double-digit growth in both revenue and profit in 2016. Sephora also has prestigious stand-alone (and decidedly non-Penney) locations such as, Fifth Avenue, Times Square and the World Trade Center in New York City.
Penney, through a spokeswoman, declined to provide details about its partnership with Sephora, but it has been eating the capital costs to build Sephora locations within stores, giving free publicity to a brand it doesn’t own.
Clearly the agreement doesn’t preclude Sephora from opening its own locations in the same towns. What will happen if Sephora’s fortunes continue to rise as Penney’s market cap continues to slide? In a nightmare (for Penney) scenario, Sephora could wind down the partnership if it determines the association is hurting its brand, while Sephora-owned stores sop up the diverted traffic.
On its site, Sephora celebrates Penney as “the nation’s largest apparel and home-furnishings retailer.” It isn’t. In fact, the National Retail Federation ranks Penney in 39th place among retailers, behind Wal-Mart Stores (WMT) (No. 1), Home Depot (HD) (No. 4), Target (TGT) (No. 6), Amazon.com (AMZN) (No. 8), Lowe’s (LOW) (No. 10), Macy’s(M) (No. 15), TJX (TJX) (No. 18), Sears (No. 20), Kohl’s (KSS) (No. 25) and Nordstrom(JWN) (No. 34).
In 2013, Penney was removed from the Standard & Poor’s 500, a blow that strikes a stock from the radar of major-index investors, and landed in the S&P MidCap 400 index. It could lose that perch as well if, say, its appliance sales are a wash. With a market cap of $1.7 billion, Penney is near the $1.6 billion floor for the index and is already under the $2.1 billion ceiling of the next leg down, the S&P SmallCap 600.
The parameters of the indexes overlap and, according to an S&P spokesman, a committee determines if a stock were eligible to continue to be part of an index should it fall below or near a floor.
Penney successfully walked a tightrope in 2016 to market jeers instead of applause. Not even Penney insiders cheered. Since Ellison’s brave August purchases, no Penney executives have bought the stock, and there’s no way to make that sound pretty.

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