It's Clear That JCPenney Is Doomed When All Its Core Customers Die

The worst thing to come out of JCPenney's long, rough slog of an earnings call this morning, is the confirmation that executives have no plans for what to do with the retailer when its core customers have all gone — and they'll be gone soon enough, because they're all Baby Boomers.

To review this morning's action — not even the power of rival hedge fund manager Kyle Bass revealing a long position in the company could stop the carnage of JCPenney dismal Q2 earnings report. The stock's subsequent nose dive proved the market isn't convinced that the company has the recipe for a turnaround, whether hedge fund Bill Ackman is meddling with the store or not.

But it was that meddling that JCP CEO Mike Ullman focused on from the beginning to the end of this morning's call. His argument was that Ackman and former CEO Ron Johnsons' plan for the future of the retailer disrupted its relationship with its core, brand loyal customers. This isn't anything new.

"The obvious question," said Ullman at the beginning of the call, "is what do we stand for?"

In Ullman's mind, the company stands for its past. He touted its return to brands like St. John's Bay and Arizona — brands customers love that Ackman and Johnson tried to replace with a hipper vibe. Under Ullman JCPenney is refilling their stock's of these brands

"There's still that core Baby Boomer customer that will not change brands," said Brian Sozzi, CEO of Belus Capital Advisors. "They know their sizes, the way they fit and how they wash, and they don't want to drive to Kohl's."

This is the customer JCPenney is desperately trying to get back. They know what these people want, and they know how to deliver it as a store. But Baby Boomers won't be around forever, and if you look at the numbers, JCPenney isn't investing in that fact at all, and at this point it's clear that they don't plan to.

Look at it this way — Ullman admitted that capital expenditures of $439 million are high for this quarter, but that it was all to get the company back to where it used to be. After that he promised capex would decrease, and that the company was looking at total capex of $300 million for 2014.

To put that in perspective, as Brian Sozzi pointed out to Business Insider, for the past five years JCPenney has spent over $700 million on capex annually.

That means Ullman is running in place. He said that $300 million in capex would be spent on things like making sure the stores are up to snuff and bringing in more Sephoras.

Sephora is a relatively high end, boutique makeup store that the kids love. It is one of the few triumphs of the Ackman-Johnson era, and it's one of the few things that is working at JCPenney.

You would think that Ullman would be figuring out ways to do more of that, instead he's cutting the store's capex in half.

"Macy's meanwhile is remodeling their stores," said Sozzi. "They're putting in cool shops but the vendors are paying for it."

In short, retailers have to modernize, and there is a right way to do it, but JCPenney simply hasn't figured it out yet at all. They're living one day at a time.