J.C. Penney's (OTC:JCPN.Q) CEO Jill Soltau has been working to turn her chain's fortune around, but the company has come close to running out of money. The retailer has $4 billion in long-term debt and $1.7 billion in liquidity, but most of that is a revolving credit line. To buy itself time, the company has been trying to get more access to cash and push out the maturity of its loans. That might happen, but borrowing money is expensive, and with no sign of a turnaround, doing so may just be putting off the inevitable.
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This video was recorded on Aug. 13, 2019.
Dylan Lewis: Why don't we kick off with our first story about J.C. Penney? This is a business that's been struggling for quite some time. We've seen news over the past week that they are now trying to work with creditors to arrange some debt-swap arrangements.
Dan Kline: For a long time, I was a believer. I truly felt Marvin Ellison, the former CEO, was doing all the right things. He was going into areas that Sears was abandoning. He was adding toys when Toys R Us went out of business. Really smart moves. Then, maybe about a year ago, when they were looking for his successor, I started visiting JCPenney stores and looking at how they were executing things. Toys were in a clump on the floor, and they weren't a good selection. Being someone who used to run a toy store, I can fairly say that. It was almost like, what toys can you get the best terms on? And a lot of their merchandise was filled with whatever they could get. We joked about this earlier, but they literally have racks of the cheap novelty suit that has dollar bills printed on it or the American flag. I don't see a big market for those.
Lewis: No, I'm not buying that every day.
Kline: So, they're not connecting the moves that seemed like they were going to work, like appliances -- Jill Soltau, the new CEO, immediately got rid of that. I get it. It's a very cash-intensive business. She believes more in apparel for the turnaround. I don't agree with it, but I understand it. They have $4 billion in long-term debt and only $1.7 billion in what they call liquidity, but that is largely a revolving credit line. They have under $200 million in cash, is that accurate to say?
Lewis: Yeah, $170 [million].
Kline: They report on Thursday. They lost over $100 million in the last quarter. It is very likely that they will have eaten up a lot of their available cash. If I'm a vendor, and you're going to place an order from me, I am not sending you that order if you don't have the cash on hand. I'm not taking it based on you having a credit line when there's media reports about how much trouble you're in. So what they're trying to do -- and they've brought in a restructuring firm to help them do this -- is get some more credit, extend the terms of their deal, push off their balloon payment to 2023, which is really far away if you actually are doing well, it should be plenty of time to pay that bill. But the reality is, they are trying to get ahead of the stories that started happening with Sears of "vendors aren't going to sell to us."
Lewis: And that's part of the death spiral. You wind up in a situation where you have a very large debt burden, people start getting worried about whether they're going to get paid, and your inventory isn't nearly as attractive as it would be if vendors trusted you.
Kline: Yeah. And this is anecdotal, but I've been to many JCPenneys, I am a JCPenney customer -- this shirt isn't from JCPenney, but I have many similar ones like it that are. When you go to JCPenney, and you're trying to buy shoes, and they only have the oddball sizes, or you need something simple, like, I want a Star Wars T-shirt, and you have 15 different Star Wars T-shirts, and you're like, "Wait a minute, you only have small?" That's a sign of the inventory being put on shelves just to fill space and look filled. And honestly, as someone who's been in retail, there were times of year, like in February, at the toy store, a lot of our inventory, we had no intention of ever selling it. We knew we weren't going to sell anything again until April, so we were pushing off some of our expense and faking our inventory. The problem is, JCPenney at Christmastime doesn't look good.
And yeah, it becomes a death spiral. You go to JCPenney to buy something specific. You get there, and they don't have it. And nobody goes, "Hey, I wanted a Star Wars T-shirt. You don't have that. I'll buy a sweater."
Lewis: And it's not that this business isn't committed to inventory. If you look at their current assets, all told, they have about $3 billion in current assets. I think $2.5 billion there has been eaten up in inventory in some phase or another. So a lot of the money they have tied up right now is in physical goods they're trying to sell. It's just not the right stuff.
Kline: Right. And the problem is, one, I don't believe their issue is a "right stuff" problem. Yes, you need the right inventory. Jill Soltau may be correct when she says they need higher-end women's apparel, and they need to go with what worked in the past. They just partnered with Shaq on a line for big and tall guys. Those might be all the correct moves. But if you don't have the money -- and they do not -- to revamp how you do business, meaning, full omnichannel; I can more or less think what I want from JCPenney and either pick it up in the store -- I'm teasing when I say think, but like, type it in the app, know if I can get it delivered in the store. They are not set up to ship most orders direct from stores, which leads to inefficiency. You look online, the JCPenney down the street -- I don't know if there's a JCPenney down the street here --
Lewis: There is!
Kline: The JCPenney down the street has it, but they send it to you from a warehouse in Sheboygan. That's very inefficient. They don't have the money. They've talked about revamping some of their checkout process, which is awful. It's a very old-school department store checkout, where the men's section has a checkout, but you can never tell if someone's working there. There's also a general checkout, but it's built around loss prevention, not convenience. So they can't afford to redo the layout of all their stores. They should be figuring out how to offload expense in their stores, things like store-within-a-store, which didn't quite work for Sears but has worked very well for Best Buy; even Walmart has made a lot of money doing that. And I don't see any of those moves being made.