With comparable-sales growth having ground to a halt over the past few years and profitability under pressure, J.C. Penney (JCPN.Q) has increasingly relied on asset sales to generate cash. It needs these cash inflows in order to steadily chip away at its massive debt load.
J.C. Penney is hoping that the combination of a strong economy, merchandise improvements, and competitors' store closures will allow it to get comp sales growing again. This is the only way that it can return to sustainable profitability. But in the meantime, it continues to monetize excess real estate and other underutilized assets to bring in extra cash.
Asset sales have become a regular feature
J.C. Penney really began to ramp up its asset sale activity two years ago, when it decided to monetize the rest of its headquarters campus in Plano, Texas. The company sold its home office and 45 acres of surrounding land for $353 million. Since then, it has leased back about 65% of the building for a downsized headquarters.
In total, J.C. Penney's asset sale proceeds totaled $327 million in fiscal 2016. The company will receive another $50 million related to the headquarters sale a few years from now.
Asset sales have been a major source of cash for J.C. Penney recently. Image source: J.C. Penney.
Fiscal 2017 was another good year for asset sales. J.C. Penney kicked off the year by selling its distribution center in Buena Park, California for $131 million, booking a $111 million gain. It also completed some smaller asset sales throughout the year, bringing its total fiscal 2017 proceeds to $163 million. Separately, J.C. Penney sold the lease for its Paramus, New Jersey, store in the fourth quarter for $50 million and closed that location earlier this year.
In the first quarter of fiscal 2018, J.C. Penney received another $39 million from asset sales. The vast majority came from the sale of its Milwaukee-area distribution center. J.C. Penney is consolidating its operations from that facility into two nearby distribution centers.
More activity in the second quarter
J.C. Penney's fiscal second quarter has been marked by at least two major asset sales. First, the company decided last month to sell its three corporate jets. J.C. Penney expects to bring in about $20 million of proceeds from selling the aircraft and related assets, although it is not clear if it will receive the cash during the second quarter. It will record an impairment charge of about $50 million related to this decision, but this move will reduce ongoing expenses by $5 million to $10 million annually.
Second, J.C. Penney closed on the sale of its Manchester, Connecticut, distribution center for $70 million earlier this month. The company had been drastically underutilizing the massive 1.9 million square foot facility in recent years.
As was the case with the headquarters sale a couple of years ago, J.C. Penney will lease back a portion of the Manchester distribution center. It plans to gradually downsize to around 600,000 square feet of space there. The buyer will be able to bring in new tenants in the remainder of the building.
Steady progress
J.C. Penney ended the first quarter with only $181 million of cash and equivalents, compared to $4.4 billion of debt and capital lease obligations. That included $351 million drawn on its credit facility.
The company will be able to use the roughly $90 million in proceeds from selling its Connecticut distribution center and corporate jets to continue reducing this debt load. Between the asset sales and seasonal improvements in working capital, J.C. Penney has probably repaid most (if not all) of the $351 million in credit facility borrowings it had at the end of last quarter.
If J.C. Penney can continue to find $100 million or more of asset sales each year, while also generating positive free cash flow from its core business, it will be able to gradually improve its balance sheet over the next few years. This will reduce its interest expense burden and put the company in better position to survive the next retail downturn.
