Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: J.C. Penney (NYSE: JCP) shares were tumbling again today, falling as much as 17% after Goldman Sachs said the retailer would have to take on more debt to stay afloat.
So what: Citing J.C. Penney's need to rebuild its inventory for the coming holiday season, Goldman issued an "underperform" rating on the stock and said it expects the retailer to burn through more than $300 million in cash this quarter as it restocks the private-label items that former CEO Ron Johnson had jettisoned in his attempt to remake the brand. The expected negative cash flow will require yet another debt offering for the ailing retailer.
Now what: This is not the first time investors have been worried about a cash crunch. The retailer has been bleeding cash ever since Johnson took the reins and drove sales off a cliff, having accumulated a negative free cash flow of $2 billion over the last two quarters. Rumors began circulating last week that the company was seeking additional funding even though it had borrowed $2.25 billion from Goldman back in May. CFO Ken Hannah had also promised on its recent earnings call that the company wouldn't need more cash this year. I'd expect a statement from management to calm the market, but it's hard to see what the bull argument is for J.C. Penney at this point. Even if sales flatline, Penney will still be posting huge losses, and it already carries nearly $5 billion in debt. I'd look to rivals such as Macy's and Kohl's as a way to take advantage of Penney's demise.
Better bets in retail
J.C. Penney's aging customer base and 20th-century real estate put it at a disadvantage before its recent woes. But there are plenty of retailers who are in the right place at the right time. Find out about a group of them in The Motley Fool's special report "3 Companies Ready to Rule Retail." Uncovering these top picks is free today; just click here to read more.