J.C. Penney Says It's Making Progress, But Is It Enough?

A little over two weeks ago, I placed a skeptical eye on J.C. Penney  (NYSE: JCP  ) after reports surfaced saying the struggling retailer was looking for more cash to fund its turnaround efforts.

After all, it had only been a mere four months since it secured a $2.25 billion loan with Goldman Sachs, indicating the company seemed to be burning through capital far too quickly.

As it turned out, and despite a seemingly contradictory statement just a few days later in which the company said it was "pleased with its progress thus far," J.C. Penney was about to shock investors by announcing plans to sell 84 millions shares of common stock at $9.65 per share, or a more than 7% discount to the previous day's closing price.

As a result, last week I voiced fears the business could have been doing much worse than J.C. Penney was letting on, especially given that the company had chosen to remain silent with regard to its crucial core same-store sales and the circumstances surrounding its quest for more money.

Here's what J.C. Penney says now
But on Tuesday, J.C. Penney went out on a limb by issuing a new press release providing more detail for investors with regard how everything's progressing.

So what did they tell us that we didn't already know?

First, J.C. Penney's comparable-store sales for the fiscal month of September fell 4% over the same year-ago period.

What's more, they also pointed out that represents a 580-basis-point improvement over last month's results. Of course, we should also keep in mind the bar was already set low, considering last year's dismal third-quarter results subsequently drove the stock down to fresh 52-week-lows. But investors are merely looking for any signs of the company's ability to stem the bleeding, so a 4% fall in comps may be enough to appease those worries.

Next, and as they hinted in their previous statement, sales on jcp.com have risen 18.6% over this time last year so far in the third quarter. September online sales fared even better, jumping 25.3% year over year.

On the downside, J.C. Penney also stated that gross margin continues to struggle from a combination of lower clearance margins from the company's inventory overhang during the first two quarters of this year, as well as its transition back to the old coupon-centric approach and away from former CEO Ron Johnson's attempts to focus on providing "everyday low prices on high-quality merchandise." 

J.C. Penney also stated it closed its aforementioned public offering last week, netting the company roughly $785 million in cash. As a result, and keeping in mind J.C. Penney says it previously disclosed it expected year-end liquidity of around $1.3 billion, it now expects to end the year with liquidity "in excess of $2 billion."

For those of you keeping track, however, remember less than two months ago J.C. Penney said it expected to end 2013 with more than $1.5 billion in total liquidity, including its $1.535 billion in cash and the remaining undrawn portion of its credit facility as of the end of last quarter.

What's more, last quarter J.C. Penney said during its second-quarter conference call that the underperformance of its Home stores significantly affected comparable-store sales. At the time, however, J.C. Penney said it was undertaking several merchandising initiatives "to make the Home assortments more compelling to customers."

Unfortunately, J.C. Penney elaborated in this week's update that implementing its new Home strategy has been "more challenging than originally planned," and that the merchandise, shopping environment, and prices they've offered in the segment "have not resonated with consumers, and sales trends remain weaker in stores."

Foolish takeaway
As it stands, though it's tempting to say "less bad" is actually good, I just can't get excited about shares of J.C. Penney -- at least until they can prove they have what it takes to stop burning cash. 

In the end, despite the underlying positive tone of Tuesday's update from the company, it still leaves too many variables in place which could set up optimistic investors for a surprise disappointment going forward.

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  • Report this Comment On October 09, 2013, at 7:00 AM, Matt8265 wrote:

    The fact is that yesterday news forces a retractment of your previous assumptions regarding sales and cash on hand. Man up, and quit parsing words to your favor. There was and is no reason for the unreasonable doom created by MF, but there seldom is.

  • Report this Comment On October 09, 2013, at 8:06 AM, bugmenot wrote:

    That's nonsense, given their track record. The fact that the stock offering news came out very shortly after the announcement that funding was not needed casts doubt on other subsequent statements from the company. Let the results speak for themselves. Looking at their balance sheet and continued missteps, it would be wise to wait and see, or risk being trampled by an exodus of sellers.

  • Report this Comment On October 09, 2013, at 4:44 PM, TMFSymington wrote:

    @Matt8265, I applaud JCP for coming out and telling us how same-store sales are panning out (that's the reason I wrote this article in the first place)...4% drop isn't as bad as many had hoped, especially after the brutal drops they've experienced in past quarters.

    But that still doesn't change the fact the company is burning through cash like crazy, or that they had to resort to a hugely dilutive stock offering at below-market prices in an effort to stay afloat.

    And for the record, as I mentioned in the article, JCP's year-end cash position will be even worse than they expected it to be less than two months ago.

    Will they be able to stop the red ink by reverting to their old way of doing things? Maybe.

    Does that make them a great investment over the long-term? Hardly. Until they prove the improvemens are sustainable, JCP remains a speculative risk that's simply too great for my taste.

    In the meantime, I'm convinced there are much better places investors can put their money to work.

    Cheers,

    Steve

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