J.C. Penney (JCPN.Q) has $1.75 billion in cash available and $4 billion in debt, much of which comes due in 2023, according to its second-quarter earnings report. That gives the company time to negotiate with its creditors to push those debts further off.
The problem is that most of that cash is a revolving credit line and the retailer had only $175 million in actual cash as of Aug. 3. On the plus side, that's about what it had at the same time last year ($171 million on Aug. 4, 2018), but it's not enough to engineer a turnaround or pay off debt.
And while the company roughly maintained its cash position, it did so by cutting its inventory by 12.5%. The chain still saw comparable-store sales drop by 9%, and it lost $48 million -- better than last year's Q2 loss of $101 million.
J.C. Penney does not have enough cash to complete a turnaround. Image source: J.C. Penney.
Yes, it's still bad
CEO Jill Soltau desperately wants to spin a loss, a rapid decline in sales, and limited hope of getting lost customers back as evidence that her turnaround plan is on track. Her remarks in the earnings report were upbeat as she tried to present the results in the best light possible.
"I am pleased with the results we delivered this quarter and the progress we are making against our plan. While we still have work to do on our top line, I strongly believe that growing sales in an unprofitable way is simply not an option," she said. "The only way I know how to reconstruct a business is through a holistic approach across all the key tenets of strategic, purposeful, and effective retailing."
Nothing in that statement addresses how a company with almost no money and significant debt might make meaningful changes to its trajectory. That did not stop Soltau from highlighting what she considers positives.
"Notably this quarter, the meaningful improvement we delivered in cost of goods sold was driven by lower permanent markdowns, improved shrink results, increased store and online selling margins, and the exit of major appliance and in-store furniture categories," she said. "Additionally, we reduced inventory by 12.5% as we continue to reinstate the discipline required to improve inventory management and productivity. "
That all sounds nice, but history has shown that retailers can't cut themselves to profitability, especially when faced with significant debt. Soltau wants to make a turnaround happen, but it's hard to think of a move she has made that shows creditors that the chain has any chance of survival. There's no magic bullet for Penney, no brilliant idea that will make up for decades of mismanagement.
It's all about inventory
When inventory shrinks by 12.5%, sales potential decreases as well. J.C. Penney may have had some room to trim stock of certain items and exit other areas, but it needs to replace failed categories with ones that can be successful. Soltau knows this, and everything she said was more or less to persuade vendors that the company can pay its bills.
"Delivering on our customers' expectations relies heavily on our vendors and the portfolio of brands we offer," she said. "The ongoing dialogues and interactions we are having with our vendors are strong and positive -- they are equally excited about our direction and are bringing new ideas and innovating with us,"
They may be, but they're also worried about being paid -- and a company with almost no cash that loses money and has $4 billion in debt is not a great bet. The relatively new CEO may have lots of ideas, but she does not have the billions needed to turn the company around.
J.C. Penney's slow death isn't about merchandise or tweaking its apparel lines. Those things are important, but even getting them right won't build the omnichannel and shipping infrastructure that major retailers need to survive when competing with Amazon.com.
Giving J.C. Penney more time to pay its bills may ensure creditors get more of their money back (though that's hardly a sure thing). It also may just drag out the inevitable and keep a dying company on life support when it has no chance of turning things around.
