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J.C. Penney's numbers provide minimal clarity

by Richard Collings | Published May 9, 2013 at 10:25 AM

J.C. Penney Co. revealed some key numbers from its first-quarter results on Tuesday evening, including a 16.6% drop in comparable store sales and $821 million in cash and cash equivalents as of May 4.

The troubled retailer's stock gained nearly 7.4%, to close at $17.61 on Wednesday, as investors apparently had been expecting even worse results.

But while J.C. Penney did not burn over $1 billion in cash in the first quarter as some industry watchers predicted, it made a gallant effort toward that mark.

With nearly $960 million in cash and cash equivalents at the end of its fourth quarter, the company seems to have burned through all the cash it had at the end of its fiscal year.

Not only did it burn through that $960 million, but likely another $29 million, if the $821 million in cash and cash equivalents figure as of May 4 is accurate. That's what would be left after the company drew $850 million on its revolving credit facility. In which case, the burn totals nearly $1 billion.

Also troubling is that company's slide has not really abated. The 16.6% decline in comparable store sales follows an 18.9% drop in the year-ago period.

Chief executive Myron "Mike" Ullman is said to be stopping or slowing store renovations and store-within-a-store conversions. Those projects -- begun by former CEO Ron Johnson -- may be partly to blame the disappearance of so much cash and might also account for the decline in sales. Space under construction cannot be used for merchandise.

For the first quarter, J.C. Penney said total sales were about $2.6 billion, down 16.4%, from nearly $3.2 billion a year ago.

"The sales decline in the first quarter is partially attributable to construction activities in connection with the transformation of the home departments in 505 stores," the company said in a statement.

J.C. Penney also cited Johnson's pricing and marketing strategies, such as the elimination of promotional events consisting of storewide sales and coupons.

The burning question for J.C. Penney now is how much of the cash it spent is actually attributable to remaking its stores and how much can be traced to operations. It would reveal how readily Ullman can slow the company's spiral toward bankruptcy and buy time as he contemplates his next steps. Putting construction on hold would allow him to conserve some cash.

But the company hasn't given any details on what it's using the cash for. So analysts cannot tell whether the construction and renovation really are the main causes of the cash burn. Ullman would face a much more difficult task if the main source of the hemorrhage is operations.

J.C. Penney was able to obtain a $1.75 billion asset-backed term loan from Goldman, Sachs & Co. on April 29, which should also give it some additional time to turn around. The loan is backed by the retailer's real estate and "substantially all other assets of the company," including trademarks on its name and the brands it owns.

The loan essentially monetizes its real estate, rather than selling off real estate converting to a REIT or engineering a sale-leaseback deal.

According to data provider Thomson Reuters, J.C. Penney has $253 million outstanding on 7.125% debentures due in 2023. The asset-backed loan will likely be used to pay those debentures, releasing J.C. Penney from the debentures' covenants and allowing it to draw on the $1 billion remaining on its revolver.

Antony Karabus, president of financial advisory firm Hilco Trading LLC's SD Retail Consulting practice, said Ullman has removed the immediate crisis, deferring the balance sheet problem. The revolving credit facility and the Goldman loan give the CEO some breathing room.

Despite the loan, Moody's Investors Service downgraded the company's long-term rating. The agency said in a statement that "[a]lthough the term loan bolsters JCP's liquidity, it will not solve JCP's longer term performance concerns nor reduce the level of anticipated cash burn at JCP over the next twelve months."

Moody's lowered J.C. Penney's corporate family rating from B3 to Caa1 on April 30. But the downgrade could have been worse. Moody's said it did not go further due to the adequacy of the retailer's near-term liquidity, and noted a sizeable cash flow burn in 2013 "that will be supported by the proposed $1.75 billion term loan and the $1.85 billion revolving credit facility."

Moody's added, "The rating also acknowledges the lack of near dated debt maturities. JCP's nearest debt maturity is not until 2015 when its $200 million 6.875% medium term notes mature."

In the wake of Johnson's ouster, George Soros' Soros Fund Management LLC revealed that it had accumulated a little more than a 7.9% passive stake in J.C. Penney, according to a 13G filing made with the Securities and Exchange Commission on April 25.

And activist investor Bill Ackman, who leads hedge fund Pershing Square Capital Management LP and sits on J.C. Penney's board, has said he remains committed to the department store retailer. Pershing Square has a 17.8% stake in J.C. Penney, according to Thomson Reuters.

The Daily Deal previously confirmed that the company has retained Blackstone Advisory Partners LP as a financial adviser.

The company's total debt has increased to about $3.8 billion as of May 4, including the $850 million drawn on its revolver and the nearly $2.9 billion in long-term debt. Capital leases and notes payable rang up to $100 million.

J.C. Penney declined to comment. The company expects to release its full fiscal first-quarter results on May 16.

-- Jonathan Schwarzberg contributed to this report.

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J.C. Penney's numbers provide minimal clarity

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