Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



J.C. Penney's Turmoil Continues

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

Embattled department-store operator J.C. Penney (NYSE: JCP  ) has been hit by another wave of selling pressure this week. On Wednesday, the New York Post reported that CIT (NYSE: CIT  ) -- the largest commercial lender in the apparel industry -- had stopped financing vendors for J.C. Penney.

J.C. Penney rebutted the story the next day, saying that CIT had told it directly that the reports were untrue. The company also added that it maintained the strong support of all of its vendors, ensuring that it will be able to procure the inventory it needs. Furthermore, J.C. Penney pointed out CIT finances less than 4% of its inventory, implying that its exposure to a credit cut-off from CIT would have been manageable anyway.

On Friday, the Post ran a follow-up story, stating that CIT had lifted its hold on J.C. Penney vendor financing on Thursday morning, after first imposing it on Tuesday. In other words, it is possible that the Post's story was true on Wednesday, but no longer "true" by Thursday, when J.C. Penney issued its press release.

The fact that J.C. Penney vendors may have been denied routine financing highlights just how dire the company's situation has become. The problem may be resolved for now, but J.C. Penney will need a rapid improvement in sales to avoid a repeat of this week's incident. A more significant withdrawal of vendor support could lead to a "death spiral" for J.C. Penney, forcing a bankruptcy reorganization. This is a big reason for investors to avoid J.C. Penney stock until there is much more clarity on the company's future.

Bleeding cash?
To reassure investors, J.C. Penney stated in its rebuttal of the New York Post story that it expected to end Q2 with $1.5 billion of cash. However, that figure implies that J.C. Penney may have burned more than $1 billion of cash during the quarter.

J.C. Penney ended Q1 with $821 million in cash and cash equivalents. J.C. Penney then completed a $2.25 billion debt offering early in Q2, of which the company received about $1.9 billion after completing a tender offer for some other debt. If no additional debt was repaid, J.C. Penney would have had to use $1.2 billion in cash during the quarter, to be left with only $1.5 billion now. Even if the company fully repaid the $850 million drawn on its credit line -- which is unlikely -- that would still imply a cash burn of at least $350 million during the quarter.

Sales trends are unclear
If J.C. Penney can manage to turn around sales and margin trends, the company will be able to repair its balance sheet over time. However, this turnaround possibility isn't something I would bet on. There are still plenty of analysts who believe J.C. Penney will eventually recover, but some previously bullish analysts are finally coming to grips with the scale of J.C. Penney's problems.

For example, Citi analyst Deborah Weinswig -- who was a vocal supporter of J.C. Penney even late in Ron Johnson's 17-month tenure as CEO -- recently advised investors to sell. She wrote that she was surprised to find that the reintroduction of coupons and promotions had not led to a return to sales growth. As I've discussed in previous articles here at the Fool, it's easier to drive customers away than to win them back. So far, J.C. Penney's pricing changes and apologies haven't had the desired impact on customer traffic and sales trends.

Watch out!
J.C. Penney stock is approaching 52-week lows again, but this company looks more like a value trap than a value investment. J.C. Penney has had to issue billions of dollars of debt to fund heavy capital expenditures and substantial operating losses over the past two years. Despite all of these investments, there are no clear signs of recovery on the horizon.

This week's vendor financing "incident" provides yet another cause for worry. For the moment, CIT has resumed its financing activities (assuming that the company did stop lending for a brief period of time). However, if J.C. Penney's balance sheet continues to deteriorate, lenders will start to withdraw support for J.C. Penney's vendors, devastating the company's supply chain and virtually forcing a bankruptcy. Investors should therefore think twice before buying J.C. Penney as a turnaround play.

J.C. Penney has fallen victim to the biggest paradigm shift in retail since mail order took off at the turn of last century. Yet if you understand the new landscape, you may be able to discover the companies that will rule the next generation of retail, leading to big profits. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.

Read/Post Comments (0) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2577783, ~/Articles/ArticleHandler.aspx, 9/28/2016 2:53:29 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,310.09 81.79 0.45%
S&P 500 2,166.82 6.89 0.32%
NASD 5,308.44 2.73 0.05%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/28/2016 2:37 PM
JCP $9.47 Down -0.09 -0.89%
J.C. Penney CAPS Rating: *
CIT $36.08 Up +0.60 +1.69%
CIT Group CAPS Rating: ***