As someone who's been doubtful about the ability of J.C. Penney (JCPN.Q) to right its listing ship, I think there's something of a bandwagon mentality now as more calls go out claiming the retailer is about to sink, and just like that, I feel more hopeful than ever the department store chain is coming off the clearance rack.
It's not easy going against the flow, particularly when heavyweights are on the other side. Goldman Sachs (GS 1.59%) is essentially betting on a bankruptcy, Citigroup is putting a liquidation value at just $1, and even hedge fund investor Bill Ackman threw up his hands and threw in the towel on his investment. That's not just a ripple in a pond, but rather some tidal forces pulling at this once venerable retailer.
Buying Penney's stock now could be akin to catching the cliched falling knife, but I don't think so. Goldman, for one, is talking out of both sides of its mouth. Out of one side it says the "big risk" for the retailer would be to do a stock offering, while out of the other it's willing to underwrite just that, an 84 million-share offering that's out to get it nearly $1 billion. Naturally Goldman's response was that research and underwriting are walled off from each other, so one couldn't possibly know what the other was doing.
That the retailer had to do an offering in the first place is hardly confidence-inspiring, particularly coming as it did one day -- one day! -- after CEO Myron Ullman said Penney didn't need to raise money this year (perhaps Goldman and Penney deserve each other), but having done so, it gives the company sufficient financial strength to ensure it does live to fight another day.
J.C. Penney estimates it will have some $1.5 billion in year-end liquidity, even if that was a target set prior to the offering. It's a substantial war chest nonetheless, and one that will mollify vendors who might otherwise fear they won't get paid. It might have been those vendors wanting such assurances that forced Penney's into doing the offering, but regardless of which way the conversation ran, Penney will have the money in hand.
Certainly the retail landscape isn't inviting at the moment. Retailers from Wal-Mart to Target are bracing for a weak holiday shopping season, with Wal-Mart telling its vendors it wants to cut inventory for the next two quarters (but disputes it's because of slowing sales trends), and Macy's cut its outlook for the year after reporting disappointing quarterly numbers.
Yet starting from such a low base as Penney's is, the company is still anticipating growth in same-store sales, at least marginally, and anticipates the trend continuing throughout the fourth quarter. That's in line with expectations other retailers have whose financial metrics aren't much better than Penney's even though they're supposedly not in the same financial straits.
If you look at their current and quick ratios, for example, some down-and-dirty numbers that give a reading on whether a company can pay its bills, Penney's stand at 1.4 and 0.4, respectively, hardly a testament to strength (you typically want your current ratio 1.5 or above and your quick ratio above 1.0, but click here to read more), but Macy's is at 1.5 and 0.3 respectively; Dillard's, 2.1 and 0.2; and Sears Holdings, 1.1 and 0.1.
Although I'm not a big fan of considering too deeply how much real estate the retailer owns and how it's connected to its valuation, real estate is something Penney's does have in its corner. But the commercial real estate market isn't robust and Sears itself has had a hard time monetizing its supposed real estate advantage, explaining why I discount the benefit.
The retailer has changed course and is rejecting the disastrous everyday low-price model championed by its former CEO (no matter how much sense the policy made). Doorbuster sales are back, popular private-label brands (e.g., Joe Fresh) are expanding, store resets have eliminated in-store brand shops, and coupons and aggressive promotions suggest a willingness to fight for every customer even at the expense of margins. The picture suggests the worst of the leaks have been plugged and the additional capital from the offering gives it the necessary ballast to stay afloat.
If it can just stay to the lee side of analyst opinion for a while more, I don't think J.C. Penney will sink to Davey Jones' locker and may yet sail off into a very profitable sunset.
