How Fast Will J.C. Penney Make Its Cash Disappear?

Over the past two years, troubled department store operator J.C. Penney (NYSE: JCP  ) has perfected a stunning magic trick: making cash disappear! At the end of the company's fiscal year 2010, cash and equivalents totaled more than $2.6 billion; two years later, this amount had fallen by nearly 65% to $930 million. Unfortunately for investors, the company looks set to continue running through its cash at a rapid pace for the next few quarters.

Weak free cash flow
Free cash flow is an important measure of cash generation or cash usage, as it represents the amount of cash generated (or used) by the business after accounting for investments in the business (i.e., capital expenditures). J.C. Penney regularly posted positive FCF until last year, when FCF plunged to negative $820 million.

In the first quarter of fiscal year 2012, J.C. Penney's FCF was negative $684 million. If the company posts similar results in the current quarter, cash on hand would drop to less than $250 million, which is less than ideal for a retailer of its size. (That said, J.C. Penney does have a large credit line that it can use to provide short-term liquidity.) However, it is likely that J.C. Penney's FCF performance will be even worse than last year in the current quarter.

First, J.C. Penney secured a "one-time deferral of select vendor payments" last quarter of $85 million. This $85 million was paid after the end of the fourth quarter (in early February), and will therefore reduce first-quarter cash flow by that amount. Second, J.C. Penney spent only $107 million on capex in last year's first quarter, but capex will be much higher this quarter. This is because J.C. Penney is building out 20 new "shops" this spring, primarily in the home department. This requires renovating a substantial portion of roughly 700 J.C. Penney locations. J.C. Penney expects 2013 capex to be similar to the 2012 level of $810 million, and the spring shop rollouts will put a disproportionate percentage of capex in the first quarter. I am therefore projecting capex of $300 million to $400 million this quarter. The deferred vendor payments and the increase in capex could easily reduce FCF by another $250 million compared to first-quarter 2012, leaving J.C. Penney with essentially no cash on hand by the end of the quarter.

Running out of non-core assets
In 2012, real estate was J.C. Penney's savior: The company was able to sell off various real estate assets (such as ownership interests in various malls) to produce more than $500 million cash. This helped offset the company's negative FCF. However, most of its big cash-generating opportunities have been used up, though there are still some residual opportunities, such as selling land near the J.C. Penney headquarters in Plano, Texas.

J.C. Penney could thus run through most of its remaining cash by the end of the first quarter, or shortly thereafter. Many analysts now believe that the company's next move could be selling core real estate: buildings containing active J.C. Penney stores. However, this would probably accelerate the company's demise, as the most promising locations would tend to be sold, leaving J.C. Penney with only its least desirable stores. As a result, I doubt that management would make such a decision until it has lost all hope for a turnaround. By then, it may be too late for shareholders.

J.C. Penney has been a train wreck whose comeback always seems just around the next earnings corner, but investors are beginning to doubt that CEO Ron Johnson can weave the same magic that he did at Apple. If you're wondering whether J.C. Penney is a buy today, you're 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. Simply click here now for instant access.


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  • Report this Comment On March 27, 2013, at 6:05 PM, mr091468 wrote:

    If you're still in JCP, use your head! As Porky Pig once said, " it it it it's all over folks."

  • Report this Comment On March 27, 2013, at 10:09 PM, MKArch wrote:

    You forgot they reduced operating expenses by ~$1B over the course of last year. They also report having several hundred million in additional non core assets they plan to sell. As you point out they have a $2B line of credit to use and if you listened to their cc they made it abundantly clear they will slow CAPEX down if they don't generate enough cash. JCP is not going BK. BTW the boutique stores within the store are doing very well although they don't occupy enough floor space to matter "yet".

  • Report this Comment On March 27, 2013, at 10:47 PM, TMFGemHunter wrote:

    They achieved $600 million of the $900 million-$1 billion in cost reductions during 2012. That only leaves $300 million-$400 million of additional savings for 2013. That could easily be offset by continued sales declines (in some of the stores I visited recently, 20% of the floor space was closed off for construction) and margin contraction (J.C. Penney returned to frequent promotions and giving out coupons this quarter).

    Also, J.C. Penney's cash flow benefited in 2012 from reducing inventory by more than half a billion dollars. That benefit will not recur in 2013, as the company cannot reduce its inventory levels much further without really hurting sales.

    The Q1 CapEx is already happening. That alone will take cash down very close to zero, before any asset sales that may occur. I agree that the company is in no immediate danger of bankruptcy, but a credit line is a very thin cushion when the business is burning cash and the stores need further CapEx investments.

    Adam

  • Report this Comment On March 28, 2013, at 5:17 AM, JT1951 wrote:

    CEO Ron Johnson had a great track record from his years with Apple.... that is correct. However he was under the watchful eye of Steve Jobs who micro-managed the entire company including retail. Ron may be talented but the magic in Apple stores came a lot from SJ's drive for perfection and simplicity.

    I would not want to be in JCP stock.

  • Report this Comment On March 28, 2013, at 1:42 PM, MKArch wrote:

    I think the CFO mentioned in a recent analyst conference that they are up to $1B in cost reductions so Q1-13's cost structure will be substantially lower than Q1-12's. They paid down $230B in long term debt last year and I don't believe they have another maturity due until 2015 so there's some additional non recurring expense in 2013.

    Based on discussions that they want to have the majority of their transformation done before the back to school season and spring season you are probably right that they will use more cash in Q1 and Q2 and will probably dip into the revolving credit line but this means less expense in the second half of 2013 and the benefit of the new shops as well as the holiday season to pay the credit line back down. That's what it's there for, although I'm fully prepared to see flames shooting out of anyalyst heads when they report that god forbid they tapped into the LOC. Managment has made it clear they will slow CAPEX if need be based on revenues and the the banks who just uppped thier LOC certainly aren't worried that JCP is about Flame out. I don't see the need to panic. As long as the boutique stores continue to do well that's what really matters and that's what I'm fixated on.

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