J.C. Penney (NYSE:JCP), a more than 100-year-old chain, has problems on two fronts: The retailer has lost the confidence of both the market and its vendors.
Last week, shares of the department store chain’s stock hit a 13-year low, a plunge precipitated by two warnings. Analysts predicted that sales did not pick up during the important back-to-school shopping season at the end of August and the beginning of September, and a research by Goldman Sachs indicated that J.C. Penney needs to raise more cash, and soon.
The report of worse-than-expected sales results and the company’s need for more financing run contrary to the nascent turnaround narrative that investors had started to believe after second-quarter results were released August 20. Even though revenue dipped for the ninth consecutive quarter and the company’s quarterly loss widened, its same-stores sales decline slowed in the second quarter, dropping just 11.9 percent compared to the first quarter’s 16.6 percent decrease. That metric also improved each month during the second quarter, a pattern J.C. Penney said it expected to continue into the current quarter.
CEO Myron “Mike” Ullman has continued to maintain the company is on the right track. As CNBC reported, the J.C. Penney chief said at a Wednesday investor breakfast that he did not see “conditions for the rest of the year that would warrant raising liquidity.” But the company has since denied that Ullman made that comment.
After Ullman’s return to the company, Goldman Sachs arranged a $2.25 billion loan, and in the second-quarter earnings conference call, the CEO said that given J.C. Penney’s “current cash position, along with the undrawn portion of its credit facility, the company expects to end the year with in excess of $1.5 billion in overall liquidity,” including $1.2 billion in cash and $300 million available in its revolver. But just last week, company executives dropped that forecast to $1.3 billion.
Yet the fact that J.C. Penney announced the sale of as many as 96 million shares last week, with Goldman Sachs as the sole book-running manager, is another warning of sorts. It indicates that the conditions Ullman detailed had not lasted. The 96 million share sale, a staggering number, are equivalent to approximately 43 percent of the company’s existing share capital; that dilution caused J.C. Penney’s share price to drop further. Since the beginning of the year, the company’ stock price has fallen nearly 60 percent. On Friday, shares opened at $8.44, which compares to a high of $87.18 in 2007. But the sale did raise as much as $1 billion.
That J.C. Penney now has a liquidity problem hints that the retailer is burning through its cash reserves as losses continue to increase. Burning through cash is an early sign of trouble. Continuing to raise capital to offset cash burn means even more trouble — it only adds to a company’s debt burden, but J.C. Penney likely had little choice.
The liquidity problem is why Goldman Sachs analysts downgraded the company’s shares on Tuesday. “Weak fundamentals, inventory rebuilding, and an underperforming home department will likely challenge J.C. Penney’s liquidity levels in the third quarter,” wrote analyst Kristen McDuffy in a note seen by Bloomberg. “In order to safeguard against a potentially poor fourth-quarter holiday season, it is likely that management will look to build a bigger liquidity buffer.” As Forbes reported, the note even questioned the company’s future prospects, suggesting that a bankruptcy filing is a possibility.
If the stock sale shows that J.C. Penney has lost the confidence of the markets, the $1 billion it drew in shows how the retailer has lost the confidence of its vendors. Like banks, department stores rely on credit to survive; of course, for retailers, it is vendor credit. In the event that the credit dries up, the retailer would find itself in the same position as Lehman Brothers did in September 2008. J.C. Penney was likely pushed to make the hasty share sale because its vendors were refusing to provide products on credit.
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