J.C. Penney Keeps Being J.C. Penney -- to the Detriment of Investors

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Yesterday, J.C. Penney (NYSE: JCP  ) made a preliminary announcement regarding its first-quarter results for the quarter ended May 4, 2013. The announcement was made in conjunction with its earlier news that the company had secured a $1.75 billion credit facility. The good news is that the company is still a company, having successfully stayed afloat for one more year. The bad news is just about everything else.

Making all the right choices
J.C. Penney said that it was looking for a 16.4% fall in revenue for the first quarter. It's also expecting a 16.6% decline in comparable sales, due to ongoing construction work in 505 stores across the U.S. Finally, the company has managed to burn through $80 million of cash in the three months since the end of its last fiscal year. In short, J.C. Penney has continued to be J.C. Penney.

On the bright side, this could be a turning point. Maybe CEO Mike Ullman can manage to stop the company's seemingly inevitable decline into liquidation. While customers are clearly still uninterested in shopping at J.C. Penney, Ullman has been with the company long enough to know what could bring people back to the fold.

On the other hand, this might be just one more step on the road to ruin. Ullman stalled out in his last stint as CEO, and things are in a much worse place now than when he left the first time. If that's the case, this might actually be a great time to buy J.C. Penney stock, as it will have to start thinking about its backup plans, which could be excellent for investors.

Selling the family silver
The failure of the J.C. Penney retail business may be just the thing for investors. Analysts have pointed out that the company is sitting on a whole lot of real estate worth billions of dollars. By either selling that land off or bundling a chunk of it into a new business, J.C. Penney could release a huge piece of cash to investors.

The problem would be if J.C. Penney continues to rack up debt and has to pay off its creditors before it pays off stockholders. The company's new agreement with Goldman Sachs is secured partially on J.C. Penney's real estate. With so little cash on hand, the company could be in a tight spot if things don't start to turn around. Luckily, it has five years before the end of the loan term.

Realistically, the new figures from J.C. Penney aren't shocking, but I still don't think you can call this good news. It's easy to say that J.C. Penney is unsalvageable -- since everyone has failed thus far -- but Ullman deserves a shot. I'll be looking for one of two things by the end of next quarter. Either the business makes some small headway, in the form of revenue decline slowing or sales leveling off, or Ullman announces a plan to turn that real estate into cash. Without any of that in sight, I'm going to continue keeping J.C. Penney at arm's length.

Is this a turnaround story in the making?
J.C. Penney's stock cratered under Ron Johnson's leadership, but could new CEO Mike Ullman present the opportunity investors have been waiting for? 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 J.C. Penney's turnaround -- or lack thereof. Simply click here now for instant access.

Read/Post Comments (3) | Recommend This Article (1)

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  • Report this Comment On May 08, 2013, at 10:46 PM, TMFGemHunter wrote:

    With the loan being secured by most of JCP's real estate (I believe the language was "substantially all"), it seems more unlikely than ever that the company will create value through some sort of real estate transaction. That said, JCP does have the option to sell off pieces of real estate as long as it uses 100% of the proceeds to pay down the loan.

    At the end of the day, I don't think there's enough real estate value to justify JCP's valuation, and I think the company will struggle for the next few years and then probably head to bankruptcy court.

  • Report this Comment On May 09, 2013, at 7:56 AM, aaplbot wrote:

    Going BK the slow way

  • Report this Comment On May 09, 2013, at 11:04 AM, Sahminvestor wrote:

    Be greedy when others are fearful. I wish I would have followed this advice when I contemplated buying netflix after it plunged and everyone said it was doomed based on its pricing structure change. If so, I'd be up over 300%. But instead I let these articles and everyone's comments scare me away. Not this time, however. Already up 30%, I'm long JCP and after seeing their latest ads and promotions, I believe they are on their way to turning it around. If they can find he perfect blend between appealing to their older more conservative customer base, while still getting some more modern/trendy options, I feel they will achieve success. I personally have never had any desire to shop there until recently, after seeing their product lines evolve. They have celebrity jewelry designers now in addition to major home designers such as Jonathan Adler. All this should gain them new customers provided the right pricing structure is in line which appears to be happening. The final piece to the puzzle will be in treating the employees well so that you have spillover to top notch customer service.

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9/30/2016 4:03 PM
JCP $9.22 Down -0.03 -0.32%
J.C. Penney CAPS Rating: *