Is JCPenney Doomed?

The new VP of marketing for JCPenney (JCP) is either one of the luckiest people on the planet, or one of the unluckiest people ever known to man — there’s not much in between.

The market has widely assumed that JCP is on the verge of careening over a cliff and into a canyon, but few would deny that if for some reason the company can be salvaged (and that’s a big if), the masterminds behind that turnaround would become legends within the corporate world.

Needless to say, speculative investors are faced with a real risk-vs.-reward conundrum.

A Lost Cause?

The new marketing senior vice president is Debra Berman, a Kraft Foods (KRFT) defector with what most would consider an impressive C-level resume. At Kraft, Berman headed up the global branding strategy for all of the company’s product lines. Prior to her time with Kraft Foods, she spent time in the advertising agency world, where she cut her marketing-strategy teeth.

Were it any other company or any other time, JCP investors might have been impressed by the addition of an experienced executive — and some fresh ideas — to the organization’s management team. This time though, the market shrugged it off, knowing JCPenney is a sinking ship no matter who’s at the helm.

Or maybe the market knows that nearly a dozen top-level executives have left the company within the past few months, leaving gaping holes in what absolutely has to be a top-notch turnaround team.

That being said, even if Debra Berman has hit the ground running sprinting, there’s only so much marketing and branding magic that a newcomer can work. While she might be able to lure ex-JCPenney shoppers back into the stores, the retailer still must offer what the consumer wants.

And the word is, that part of the operation still is off the mark.

Time for a Serious Clearance Sale

It doesn’t help that vendors might be increasingly hesitant to sell goods to Penney’s.

Last week it was reported (by the New York Post) that retail lender CIT Group (CIT) had frozen credit for borrowers that supply JCPenney. JCPenney refuted the claim the next day, saying those vendors’ credit lines still intact. But, it’s still not clear that there wasn’t a basis of truth in the New York Post’s claim; it’s not like the newspaper has a history of spreading false information.

Penney also was quick to point out that only 4% of its merchandise was supplied by CIT-backed vendors. As they say, though, where there’s smoke, there’s fire. There’s little assurance that the lenders for JCPenney’s other vendors aren’t already thinking about doing what CIT was rumored to have done.

Either way, the liquidity of its suppliers might be the least of JCP’s problems.

To give credit where it’s due, JCPenney is starting to get back to its value-oriented merchandise roots. Unfortunately, Ron Johnson spent his 17 months with his company getting value merchandise out of the mix to make room for “shops” like Sephora and Joe Fresh. It’s going to take at least the same amount of time to undo that transplant. Also bear in mind that merchandise orders are placed about six months ahead of time, so JCP will do well to have a value feel by the all-important holiday-shopping season this year.

Bottom Line

Contrary to what the revival of the great JCPenney debate would imply, there’s nothing new here with the company. We’re just further along the path JCPenney has been on for a little more than a year.

Problem: That path still is pointing the company over the edge of the cliff.

Even if the stores’ merchandise reverts back to the low-end and basic mix that most of JCPenney’s former customers came to know and love, and even if Debra Berman can restore advertising greatness to the retailer’s marketing message, the company’s simply too deep into a sales slump to wiggle itself out of it before it runs out of cash.

At the same time JCPenney announced that CIT hadn’t cut credit to its vendors, it made a point of adding that it would end the second quarter with $1.5 billion in cash .. and that’s after netting $1.9 billion through the sale of debt during the quarter. A quick look at the numbers, and it appears Penney spent more than $1 billion last quarter alone.

The question is, on what? That spending sure doesn’t seem to be evident in or for the stores, or marketing.

Another round of financing might be necessary soon, and with recent credit downgrades from Moody’s and Standard & Poor’s, it’s unlikely any debt financing terms would be favorable. A secondary offering wouldn’t go over either, given how there’s still not a real turnaround team in place yet to entrust those dollars to.

Worse, analysts are getting back in a downgrade mood again with JCP; Imperial Capital and Citi have both lowered their opinion of the stock in recent days.

Sadly, barring a miracle and a whole lot of time, only a bankruptcy would completely clean the slate. Until then, there’s not a lot for anyone to look forward to here.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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