Following an analyst discussion about how J.C. Penney Company (NYSE:JCP) will likely have adequate liquidity through year-end but may not have enough liquidity to engage in significant inventory purchases and staffing for its 2014 holiday season, shares of the multi-billion dollar retailer declined more than 7% to a 30-year low. In essence, analysts at J.P. Morgan expect the company to perform fine this year, but if business does not show any signs of material improvement, then its liquidity may be lacking by the end of the first half of 2014 to continue operations throughout the rest of that year, potentially leading to a subsequent bankruptcy.
In a previous article I wrote on J.C. Penney, I detailed how the company's fundamentals have been deteriorating over the past few years, primarily as the result of a failed turnaround attempt by the now former CEO, Ron Johnson. Since his ouster from the company, management has been trying to revert the company back to profitability, but has had an exceedingly hard time doing so. As a result, the company has generated substantial negative free cash flows of $2.1 billion for its current fiscal year, while posting a cumulative net loss for the year of $934 million to date. On top of this, the company has been rocked by news that it was issuing more than $800 million worth of shares to the market in the hopes of raising liquidity, effectively signaling to shareholders that its business is in jeopardy.
Eventually though, news tends to die down after the market is given some time to digest everything. However, just as this appeared to be the case, the report issued by analysts that relayed the possibility that the company may not be liquid enough as pushed shares down further and made matters worse.
Is Now the Time to Buy?
With all of these factors coming out, might now actually be the time to buy shares of the struggling retailer/turnaround hopeful, or is now the time to run for the hills for fear that bankruptcy isn't too far off? Well, the answer really depends on one thing; timing. You see, should the company actually achieve the proper liquidity through its recent debt and equity issuances, as well as a result of selling enough inventory in the months to come, with which to wait out this year and the first half of next year, then it is possible that sales could improve enough that it can avoid a catastrophic end and be remembered as a successful turnaround that could earn investors a hefty return. On the other hand, if management is unable to achieve proper liquidity through these methods, then the company is bound to fail.
One thing is for sure though, despite all the bad press about the company and the improbability of a turnaround after disenfranchising its customer base, the company appears to be on the road to progress. In a recent report by the company, it was revealed that sales are still falling year-over-year, but improving on a month-to-month basis. For instance, according to one article, the company's sales in September of this year were down about 4% compared to the same time last year, but 5.8 percentage points higher than August.
Although seasonal factors could play a role, it is a promising sign that the company is at least showing some improvement on a revenue basis. Perhaps most exciting is the company's online sales, which were up 25.3% in September and 10.8% in August compared to their respective periods a year ago. Though online sales still remain a small percent of the company's revenue stream, such a large increase may indicate that consumers are open to the possibility of coming back to the store.
Unfortunately, nothing is certain in life but death and taxes (believe me when I say I know about the taxes part!), but it is possible, at times, to see general trends. The general trend for J.C. Penney for the moment is that the company appears to be on the precipice of doom, but there is a shimmer of light at the end of the tunnel. If management can leverage its resources efficiently, then maybe, just maybe J.C. Penney can see a meaningful turnaround.
Daniel Jones has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.