Trump's latest tariff may finally send J.C. Penney into its grave

Brian Sozzi
Editor-at-Large

The last thing J.C. Penney (JCP) needs is a tariff-wielding President Donald Trump.

Trump took to his second home, Twitter, on Thursday afternoon to say he will levy tariffs on $300 billion of additional goods imported from China at a 10% rate starting September 1. A large majority of the tariff increase will impact consumer goods sourced from China ranging from smartphones to apparel.

Shares of major retailers — notably struggling names such as J.C. Penney — promptly plunged on the news. And rightfully so — tariffs would significantly raise the costs to acquire inventory for retailers. Moreover, retailers could find it damn near impossible to successfully raise prices on consumers to offset their increased costs.

Jefferies analyst Janine Stitcher says apparel vendor margins are most at risk from a fresh round of tariffs as these retailers make most of their products from China. By extension, that could be bad news for already struggling department stores as they are slapped with price increases from vendors.

Department stores have next to no pricing power in the age of digital shopping. So, that means either department stores eat material price hikes (not good for profits) or try to pass on some of the higher costs even if that leads to lost sales (also not good for profits).

As for ailing J.C. Penney, anything that raises its costs meaningfully — and potentially sends more customers elsewhere — right now is highly unwelcome news.

J.C. Penney’s first quarter same-store sales plunged 5.5%, worse than the year ago marginal increase of 0.2%. The company lost a staggering $154 million in the quarter. Free cash flow was an outflow of $268 million compared to a $421 million outflow a year ago.

‘At death’s doorstep for some time’

More store closings could be on the way for J.C. Penney.

Investors continue to await a clear turnaround plan from J.C. Penney CEO Jill Soltau, who took over in October 2018. Since then, Soltau has been assessing J.C. Penney’s store base and overall operations in an effort to save the retailer. Part of that turnaround may reportedly include restructuring some $4 billion in debt coming due in the next few years.

“I don’t know if we can just point to tariffs as the reason J.C. Penney is struggling. J.C. Penney has been at death’s doorstep for some time. I can’t say when [they would go under], but it will be a true rabbit to be pulled out of a hat to see J.C. Penney still around in five years,” Sucharita Kodali, Forrester Research retail analyst, said on Yahoo Finance’s The First Trade.

At least J.C. Penney is warning investors on the possible impact from tariffs. That is provided one digs into the company’s latest annual report.

“Developments in tax policy, such as the disallowance of tax deductions for imported merchandise, the imposition of tariffs on imported merchandise, or changes to U.S. trade legislation could further have a material adverse effect on our results of operations and liquidity,” J.C. Penney said in the report.

J.C. Penney shares reflect the rising market concerns about its survival. The stock has nosedived 10% to a startling 71 cents the past five days amid renewed trade war tensions. Shares are down 70% in the past year.

Come September 1, Trump may hatchet off another 71 cents from J.C. Penney.

Brian Sozzi is an editor-at-large and co-host of The First Trade at Yahoo Finance. Follow him on Twitter @BrianSozzi

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