This is a pivotal time for J.C. Penney (NYSE: JCP ) and its shareholders, as the once-prominent retailer appears to be inching ever closer to the brink. J.C. Penney's downfall has been well-publicized, from the unsuccessful tenure of former Chief Executive Officer Ron Johnson to the failed strategic initiatives that once had so much promise to turn the company around.
News of a capital injection might have investors optimistic that the company can get its act together, but it's important to view this through the proper lens. J.C. Penney is burning cash and its sales are in free-fall. How this story will play out can't be predicted with total certainty, but it's appearing more and more that this may represent the last opportunity for J.C. Penney to save itself.
A (massively dilutive) lifeline
J.C. Penney recently revealed it had raised $932 million in an equity offering, a much needed capital infusion designed to help the company gear up for the pivotal holiday shopping season. In all, J.C. Penney offered 85 million shares at an average price of $9.65 each, which as you can easily surmise, is extremely dilutive to existing shareholders. But, when you get to the bottom of it, J.C. Penney didn't have many options left. It's been burning cash at a mind-boggling rate over the past few years, and an equity offering does little to quell fears of further cash burn.
Along with the stock sale, the company informed investors it was using cash at a faster rate than previously anticipated, which expedited the need for the cash injection. In August, J.C. Penney advised investors it would have $1.5 billion in cash by the end of the year. But, the company had to revise this forecast downward, to $1.3 billion, because as it turns out, its turnaround efforts haven't succeeded.
J.C. Penney's sales fell 25% last year, and the results so far in 2013 haven't been encouraging. J.C. Penney's same-store sales, which include sales at locations open at least one year, dropped 12% in the recently concluded second quarter. That's a massive decline, and resulted in a net loss of more than half a billion dollars. This stands in stark contrast to other similar retailers that are actually succeeding. For example, The Gap (NYSE: GPS ) reported 5% growth in second quarter same-store sales, and recently increased its full-year earnings guidance. Moreover, The Gap has increased its dividend twice this year, with its new annualized payout representing 60% growth year over year.
Another retailer firing on all cylinders right now is TJX Companies (NYSE: TJX ) , which owns and operates the Marshall's and T.J. Maxx brands. TJX grew same-store sales by 4% in the second quarter, along with strong 18% growth in diluted earnings per share in the period. And, like The Gap, TJX's second-quarter success compelled it to increase its profit expectations for the remainder of the year.
Time is running out
J.C. Penney raising cash to such a dilutive degree is a huge red flag. This seems to be a last-gasp effort to finance a turnaround that has yet to materialize. J.C. Penney is entering the absolutely critical holiday shopping season. This may very well be the last opportunity for J.C. Penney to get shoppers back in its stores and resuscitate itself. Should the company whiff on the holiday shopping season, as it already did for the back-to-school season, then the company may find itself out of options.
The company is burning cash to such an alarming extent that further capital raises will be extremely difficult if the company can't even prove it can succeed in what are basically gimme-shopping seasons for clothing retailers. The doors of the capital markets are quickly closing. I don't see how J.C. Penney would be able to access the bond markets again, unless its debt offerings were highly secured (by, say, the company's real estate assets). But, the terms would most likely make such an arrangement unfeasible. Consider that earlier this year, Standard and Poor's downgraded J.C. Penney's credit rating to CCC+. To be clear, this is now well into junk territory.
As a result, there's simply no need for investors to gamble on J.C. Penney, as the company's very existence as a going concern should now be called into question. Other retailers, such as TJX Companies and The Gap, are far more successful and are rewarding their investors with rising profits and dividends. If you're interested in clothing retailers, avoid J.C. Penney at all costs and instead give preference to TJX Companies and The Gap.
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