J.C. Penney Going From Bad to Worse

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With J.C. Penney's (NYSE: JCP  ) fourth-quarter earnings due out at the end of the month, the company still appears to be struggling with its turnaround strategy. Let's take a look back at recent developments with the troubled retailer.

The biggest change we've seen from Penney since the company last reported earnings was its announcement on Jan. 29 that it would bring back holiday-related sales. The market cheered the news, sending the stock up 10% that day, but it's the latest evidence that CEO Ron Johnson's strategy is not panning out. Johnson had made "everyday low prices" a cornerstone of the rebranding initiative unveiled a year ago, but the company has taken several steps back toward its former markdown-heavy model, including issuing customers gift cards.

Still, the company will have fewer than 100 holiday-related events, compared to almost 600 in 2011, before Johnson's tenure.

Penney's financial position is also weakening quickly. As of its last report, it had just $525 million in cash, down from over $1.5 billion nine months earlier. Meanwhile, the company's debt load still hovered near the $3 billion mark, essentially unchanged over the course of 2012. In order to delay short-term payments, the retailer turned to its lawyers, who filed a lawsuit to declare that the company is not in default of its bond agreements. The suit was in response to a letter from law firm Brown Rudnick, which said Penney had violated a part of its bond indenture agreement.

More recently, the company upped its credit facility from $1.5 billion to $1.85 billion in a move that puzzled several analysts. Investment groups have observed that the retailer will be out of cash by the end of 2013 at the current pace, and appears to be looking less and less solvent. Penney has lost more than $1.1 billion in free cash flow over the last nine months.

Nobody's home
While shareholders likely assume that Johnson and Co. are hard at work trying to turn the company around, according to the New York Post, the work ethic at HQ has only become more lax since Johnson took over, likely an indication of waning morale. Employees who used to work from 7:30 to 5:00 now come in late and leave early, and Johnson himself is only at HQ four days a week at most. He commutes from Palo Alto for the workweek, and several other execs have followed his lead, running the company from afar. Based on the Post's description, Johnson isn't even rearranging deck chairs on the proverbial Titanic, he's lounging on them and sipping margaritas.

Job cuts are also on their way, with 10% of HQ staff expected to get the ax. Management delayed the layoffs until fiscal 2013 apparently so the severance costs wouldn't add further to 2012's losses. According to some estimates, fourth-quarter sales dropped as much as 30% as the company was forced to heavily mark down items during a generally weak holiday season. Analysts are now expecting a $0.05 EPS loss during the quarter when retailers often make most of the year's profits.

Foolish takeaway
As if J.C. Penney's company-specific problems weren't bad enough, the macroeconomic climate isn't exactly being kind to its type of business these days. Holiday sales were slow across the retail sector as consumer confidence plunged amid worries over the fiscal cliff, and January retail sales barely improved as the payroll tax hike took valuable spending dollars out of consumers' hands. With J.C. Penney's core customer particularly price-sensitive, as we've seen with their reaction to the elimination of sales, the retailer figures to get hit as hard as any other from the tax hike.

Other trends such as the growth of online retail also present headwinds for Penney, whose real estate is often in undesirable locations in fading malls or rural areas that make it more susceptible to the e-commerce threat.

Combine all of the above factors and J.C. Penney's already poor situation seems to have only gotten worse. I'd expect another bloodbath when Penney reports at the end of the month. The good news is that with the arrival of 2013, its financial results will lap 2012, and thus it will be able to improve from those terrible results. Small solace, perhaps, but it represents a chance at a new beginning

J.C. Penney has been a train wreck whose comeback always seems just around the next earnings corner, but people are beginning to doubt if CEO Ron Johnson can weave the same magic that he did at Apple. Investors wondering whether J.C. Penney is a buy today are invited to claim a copy of The Motley Fool's must-read report on the company. Learn everything you need to know about JCP's turnaround -- or lack thereof -- and as a bonus, you'll receive a full year of expert guidance and updates just like this one as key news develops. Simply click here now for instant access.

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