JCP Slowly Circles the Drain

by Marc Bastow | August 20, 2013 1:38 pm

Say what you want about mismanagement, missteps, and plain old stupidity when it comes to JCPenney (JCP[1]), but let’s admit that their impending endgame will be a downright shame given the company’s iconic name in the retail industry.

What’s that endgame? James Brumley provides a hint[2], and I pinned my opinion on Jeff Reeves’ bulletin board last week: JCP will declare bankruptcy by the end of 2013. (For the record, Reeves believes it will happen in 2014). This is serious: There’s a burrito lunch riding on the result.

So let’s discuss. First the new news:

JCP’s just-released second-quarter results[3] show revenues declined from $3.02 billion to $2.66 billion year-over-year, with gross margins falling to 29.6% compared to 33.2% over the comparable period. JCP’s losses rose to $586 million ($2.66 per share) vs a loss of $147 million (67 cents per share) last year.

Net operating cashflow came in at a loss of $708 million, although its net cash position improved, with the company showing cash and cash equivalents up to $1.535 billion on the balance sheet. How did that happen despite losses? JCP drew down $2.18 billion from a $2.25 billion senior secured term loan.

JCP’s management provided an upbeat assessment of its situation (see press release here[4]), suggesting the re-transformation back to a prime retail discounter is in full swing — and investors appear to be buying the hype, with JCP up more than 6% in midday trading.

Sorry, but I’m not totally convinced. Let’s review some of the older news:

Bill Ackman, whose three-year reign of bullying on the JCP board may have had a big hand in its demise, resigned from said board … and the market reacted by selling off shares of the company, a sign of no confidence.

And why should they have much confidence? The last two years was an utter debacle, full of  bungles[5], mistakes [6]and head-slapping moments[7] when all seemed bass-ackwards on the vision front. Nobody could figure out if Penney’s was a discount retailer or a high-end boutique shop within a discount retailer.

It almost feels like a turnaround never really had a chance, and unfortunately all the company has to show for the two-year effort is a confused customer base and drained coffers.

Click to EnlargeAnd therein lies the basis of my call: cashflow and cash. They’ve got hardly any of the former, and a dwindling supply of the latter despite the (borrowed-funds fueled) bump in the latest quarter. Consider that net operating cashflow has been negative in five of the past six quarters, and at the end of April 2013  stood at a negative $1 billion with the trend decidedly heading downward. (See chart at right.)

Meanwhile cash and short-term investments stood at $821 million at the end of second quarter 2013, with actual cash of just $163 million. I recognize the increase in the cash balance at the end of the latest quarter, but its based on borrowing, not earnings.

Think anyone’s noticed the deterioration? Decidedly so — funding source  CIT Group (CIT[8]), for example. According[9] to Reuters the company stopped funding future shipments last month,  a clear warning shot across the bow. JCP denied the reports and was quick to point out that CIT-based merchandise is a small-potatoes part of its overall funding profile  (roughly 4%) , but I didn’t see or hear anything official from CIT, so I err on the side of an uncomfortable truth: CIT cut them off.

What’s it mean?

If any more of its funding sources — including its major bank lenders led by Goldman Sachs (GS[10]) — start to have doubts and balk at throwing mediocre money after bad, it’s curtains. JCP’s already seen downgrades by Moody’s and S&P, and any further degradation in the credit picture could raise JCP’s borrowing rates at a time when it can least afford more cash out the door.

Bottom line? Well, it’s the back-to-school shopping season, and JCP will need to show some serious improvement in revenues, earnings and cashflow for this quarter in order to stem the bleeding and buy more time.

If they don’t show any meaningful progress on those fronts, I think I’m right. If they do, well, Reeves might be right. Stay tuned.

Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing he did not hold a position in any of the aforementioned securities.

Source URL: https://investorplace.com/2013/08/the-jcp-countdown-begins/

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