Despite J C Penney Company Inc (NYSE:JCP) having recorded improved sales over the holiday season late last year, some analysts are of the view that the retailer is in for tough times ahead. One of the challenges facing the company is the high amount of debt that it has which is approximately $7.5 billion.
This is because the debt is contributing to interest expenses which are currently higher than the retailer’s operating income. Consequently the retailer will remain shackled to its debt for the foreseeable future and this will prevent it from operating profitably. The situation is bound to get worse when interest rates go up.
Part of the reason why sales have improved in the recent past is the addition of a wider range of appliances. However this is likely to hurt the financial performance of J.C. Penney since appliances enjoy lower margins compared to the company’s traditional fashion items.
Sears death spiral
There is also speculation among the management of J.C. Penney that the expected collapse of Sears Holdings Corp (NASDAQ:SHLD) will boost the sales of appliances at the retailer. This however is not guaranteed since Lowe’s and Home Depot will also seek to get a chunk of this business.
Following the overhaul of the U.S. tax code late last year, the corporate tax rate fell to 21% from 35%. While many businesses across the United States are expected to benefit from the tax cuts, J.C. Penney will not be one the direct beneficiaries due to a tax credit forward. It could however benefit if consumers are able to spend more at stores as a result of lower taxes and any expected benefits such as bonuses or higher wages.
Compared to the efforts other retailers are making in e-commerce, J.C. Penney is lagging behind in its initiatives. Though the company’s online retail segment is growing by double digits there is still lack of innovation and momentum.
Another challenge for J.C. Penney is the fierce competition it has to face not just from online retail juggernauts but also rival brick-and-mortar retailers.
On Thursday shares of J.C. Penney Company Inc fell by 1.55% to close the day at $3.81 per share.