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Why You Should Steer Clear of JC Penney

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The retailer continues to struggle with its switch to an everyday low prices policy, and any real turnaround could still be years away.

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JC Penney Is Running Out of Runway

The second part of Johnson's restructuring involves opening "stores within stores," or separate stand-alone outlets within the company's department stores. This move is garnering wider success. It started with Sephora beauty boutiques in 2007, and Johnson is also setting up outlets for Levi's, Martha Stewart, and the Canadian Joe Fresh fashion brand.

The concept is performing well: Johnson has said the Sephora boutiques have produced 5% same-store sales increases "independent of the JC Penney performance."

The problem? The conversion won't be fully rolled out until 2015. That means the retailer will have to find a near-term solution to its falling sales. Whether that means a return to coupons-as hinted at by the two recent promotions-remains to be seen. But either way, there's no sign that JC Penney is going to pull out of its slump anytime soon.

In another bearish signal, the short sellers are circling; JCP is now the second-most shorted stock in the S&P 500 (INDEXSP:.INX). (Short selling involves borrowing shares of a company and selling them immediately with the hope of buying them back at a lower price at a later date.) Right now, 40% of Penney's public float is sold short, behind only solar power equipment maker First Solar (NASDAQ:FSLR), at 47%.

Two Retailers With Brighter Prospects Than JC Penney

A mid-sized retailer with far brighter short- and long-term prospects is Dillard's (NYSE:DDS), which operates 284 outlets and 18 clearance centers in 29 states. It also sells goods through its website.

Dillard's reported its third-quarter results last week, and they are almost exactly the reverse of Penney's: excluding unusual items, Dillard's earned $46.1 million, or $0.96 a share, in the three months ended October 27, 2012. That's up sharply from $25.7 million, or $0.48 a share, a year earlier. Same-store sales rose 5%, and overall net sales gained 4.8%, to $1.45 billion.

The company's gross margin from retail operations was 37.1%, up from 36.7% a year ago.

The stock is up 35.5% this year yet still trades at a reasonable 13.2 times the company's last 12 months of earnings, comparable to competitors like Kohl's Corp. (NYSE:KSS) and Macy's (NYSE: M).

Wal-Mart (NYSE:WMT) also remains in a strong position to benefit during the holiday season and beyond. The company-which pioneered everyday low pricing-dominates the industry, with 10,130 stores worldwide.

Wal-Mart continues to build its online presence and expand into the grocery market by adding to its chain of Neighborhood Market stores, which offer a full line of food items, including baked goods, frozen food and local produce. Wal-Mart now operates 220 Neighborhood Markets. It aims to more than double this to 500 by its 2016 fiscal year.

The shares are up 13.5% in the past year and have lots of growth potential ahead as the economy rebounds. The company also pays an attractive dividend: quarterly payments of $0.40 a share yield 2.19% on a yearly basis.

This article by Chad Fraser was originally posted on Investing Daily.

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Twitter: @investingdaily
No positions in stocks mentioned.
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