JC Penney (JCP) just released its much anticipated third quarter results. Despite a surge of more robust sales in October, the mega-retailer continues to struggle, as the challenges to its turnaround efforts mount.
For the fiscal period ending November 2, JCP endured a staggering $489 million loss, or $1.94 per share, compared to last year’s $123 million loss, or 56 cents per share. Thomson Reuters analysts had expected a better performance, estimating a per share loss of $1.77.
And JCP’s numbers lagged across the board. Sales were down 5.1% to $2.78 billion. Gross margin winnowed to 29.5% from 32.5%, mostly the result of steep promotional discounts and the continued overhang of inventory.
Same-store sales fell 4.8%, worse than the general forecast of 4.2%. Still, CEO Mike Ullman continued to project optimism. He said, “Our strategies to reconnect with customers are beginning to take hold, and this became increasingly clear as the quarter progressed. We are proud of the company’s October sales performance, and encouraged by the early weeks of November, and believe we are making strides toward a path to long-term profitable growth.”
And October did, in fact, provide a glimmer of hope. Sales jumped 0.9% for October, a substantial improvement in light of the fact that September suffered a 4% decline. A company spokesperson said that the stronger performance was largely attributable to improved inventory in central private brands as well as an overhaul of the home goods department.
Still, considerable anxieties remain regarding the snail’s pace of JCP’s rebound back into profitability. Many industry analysts acknowledge that the increased sales are a good sign, but that other metrics are actually more significant portents of JCP’s future viability as a retailer.
JCP reported that it ended the quarter with $1.23 billion in cash, up from last year’s total of $525 million. It continues to carry a substantial debt load, pegged at approximately $5.61 billion.
And much of the anxiety on Wall Street regarding JCP’s fiscal health is based on its access to capital. The prospect of a future liquidity crisis looms large for many. Just recently, the company watched its credit rating humiliatingly downgraded by Fitch Ratings from “B-Minus” to “CCC.”
A spokesman for Fitch said that the downgrade was issued to reflect “higher than expected cash burn in 2013.” Also, they anticipate that JC Penney, despite its recent share sell-off, will still have to see additional funds next year.
A “CCC” classification, under Fitch’s ratings system, indicates that “default is a real possibility.”
According to Fitch, the principal concern is twofold: a much higher than expected cash burn in 2013 and a projected cash shortfall in 2014, pinching JC Penney’s into straitened circumstances. Even with JC Penney adding an additional $3 billion in liquidity this year (and access to $850 million more) it remains a real possibility that the retailer would have to raise even more funds in 2014, especially after what promises to be a punishing holiday shopping season.
As it stands, Fitch forecasts that JC Penney will conclude 2013 with a cash burn of approximately $3 billion, about a billion more than the projections it released in May. JC Penney suffered this year from much weaker than anticipated comp store sales, a listless home department performance, massive markdowns necessary to move piling excess inventory and a significantly contracting gross margin.
As Fitch interprets it, the central problem is not immediate liquidity, since the recent equity offering generated more than $800 million. They also still have the $2.25 billion loan they secured, with the oversight of Goldman Sachs, last May. The more pressing problem is that, sometime during 2014, JC Penney is compelled to borrow even more, likely sinking its stock, frightening already anxious investors and vendors, and leaving itself so over-leveraged it has to sell off physical assets to raise the money it needs to survive.
According to Fitch’s analysis, for JC Penney to continue to fund its annual $400 to $500 million in expenses, plus interest expenses of $360 to $375 million, it must earn at least $750 million before interest, depreciation, taxes and amortization. This means the retailer would have to perform between 14% and 16% above its own projections for 2014, a return to sales between $13.4 billion and $13.6 billion.