Some investors saw signs of hope for JCPenney (JCPN.Q) last week after the retailer reported an unexpected profit and positive free cash flow in its fiscal fourth quarter. But the stock still sold off following the news, continuing the slide that began soon after it announced lower comparable-store sales during the holiday shopping season.
Now, with the stock trading under $1 for more than a month, the retailer faces the threat of a delisting from the New York Stock Exchange. Although JCPenney could still forge a path forward, that path looks less likely to include current investors.
JCPenney beat earnings, reported positive cash flow
JCPenney offered better-than-expected news in its fiscal fourth quarter, which ended Feb. 2. Total quarterly revenue fell to $3.493 billion, 7.7% lower than the $3.786 billion for the same quarter the year before. Still, the company turned an unexpected profit as it reported adjusted net income (that is, not using generally accepted accounting principles) of $0.13 per share. This was $0.21 per share ahead of estimates but down from earnings of $0.18 per share in the year-ago quarter.
The unexpected net profit may give bulls some hope, and the company reported $145 million in free cash flow for the full fiscal year. That number would have been positive even without the $26 million generated from the sale of operating assets. In its financial guidance for the new year, the company also forecasts positive free cash flow and an increase of between 5% and 10% in adjusted EBITDA (earnings before interest, taxes, depreciation and amortization).
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Still, one positive report does not a recovery make. Despite the surprise earnings beat, JCPenney stock sold off in the following trading session, falling to $0.69 per share, a loss of 5%. Some have speculated about whether the retailer can survive the decade. Among its mall-based counterparts, Sears Holdings has already declared bankruptcy. Many have also forecasted similar troubles for consumer discretionary retailers such as Macy's and Dillard's.
JCPenney's stock remains compromised
The stock has little margin for error. It helps that JCPenney unexpectedly turned a profit. Still, it was the quarter of the Christmas shopping season. It was also the only quarter during the fiscal year to see positive earnings. The earnings report offered no help in getting the stock above the critical $1 per share level. As a result, the company may have to institute a reverse split to continue trading on the NYSE -- in other words, it would reduce its share count to increase its share price.
The slide continues as the company announces it will close at least six stores in 2020. Moreover, long-term debt decreased slightly to $3.574 billion. Still, with only $829 million in stockholders' equity and a market cap of just under $221.7 million at the time of this writing, debt remains a serious challenge. JCPenney has hired investment bank Lazard to explore debt management strategies. However, CEO Jill Soltau has denied that its advisors are looking at a bankruptcy filing.
Furthermore, these numbers did not account for any possible impact from coronavirus (COVID-19). Investors should expect a significant effect as coronavirus has caused supply-chain disruptions from China. Also, the virus could slow overall economic activity, something JCPenney can ill afford in its condition.
A turnaround looks less likely to help investors
JCPenney holds $386 million in cash and short-term investments. Nonetheless, with losses for the fiscal year amounting to $257 million, it will have to find a new source of funding in the foreseeable future or look again at its debt.
Bankruptcy might offer the company a second chance. JCPenney still owns 850 stores across the country. Moreover, many credit Soltau with helping to lead a turnaround in her nearly four years as CEO of privately held Jo-Ann. The company also pointed to "progress" in the women's apparel business. While investors may later demand that management offer more specifics, it could lead to a possible avenue for JCPenney to continue to exist in some form. Unfortunately for shareholders, orchestrating such a revival in bankruptcy offers stock investors no benefit.
JCPenney turned an unexpected profit, and apparel sales and positive cash flow gave bulls some sense of optimism. However, with the company set to face more losses, the effects of coronavirus, and the actions necessary to prevent a delisting, the path forward for JCPenney stock appears increasingly bleak. Though the CEO could orchestrate a revival for the company, it looks increasingly unlikely that such a turnaround would benefit current shareholders.
