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J.C. Penney Company, Inc. (JCP): Cash Burn Is An Issue

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J.C. Penney Company, Inc. (NYSE:JCP recently reported 1Q13 earnings and provided an update on their business. J.C. Penney is restructuring, looking for its second new strategy in just two years, and is attempting to bring customers back into its stores. The new CEO, Mike Ullman, is working to recruit a new management team to execute a turnaround plan. The stock is down about 55% over the past year as a result of its recent unsuccessful turnaround plan. If J.C. Penney Company, Inc. (NYSE:JCP) can recapture some of its customers, the stock could be a value at current levels. On the other hand, it could continue to bleed cash and continue to spiral downwards.

Management Change, Strategy will only Shift Slowly

The Board ousted Ron Johnson, only to replace him with Mr. Ullman, who was his processor in the role, a move some have criticized. Some have called Johnson’s tenure “disastrous” and that the change was necessary. It had negative cash from operations of $10 million in FY13, compared to $820 million and $592 million in the two prior years. Mr. Johnson completely changed the direction of the company. He eliminated coupons, among other actions, that alienated its customer base at an alarming rate that was much faster than the rate it attracted new customers. However, Mr. Ullman’s record was not so compelling as to ask him to return, so investors rightfully should question why he is the right person for the job this time.

The company needs capable managers now and Mr. Ullman does have a bench of people that left the company under the tenure of Mr. Johnson he can bring back. Mr. Ullman’s history with the company should allow him to quickly return to core competencies and to reach out to their customers.

The company has taken actions and brought back portions of its earlier model. It reintroduced coupons and discounting merchandise in late March. In order to negate the impact on gross margins, it raised the price of merchandise it intends to discount. The net effect on gross margins is uncertain according to Analysts, but most believe it will cause some contraction over the next year.

J.C. Penney Company, Inc. (NYSE:JCP)Certain portions of Mr. Johnson’s plan are too far along to stop. J.C. Penney Company, Inc. (NYSE:JCP) is introducing new brands and merchandise, such as Jonathan Adler. The company also is in the midst of making changes to the layout of its stores and is under construction at 500 locations currently. The face of the stores will try to look more like a collection of boutiques versus racks and racks of merchandise.

J.C. Penney Company, Inc. (NYSE:JCP) also recently hired turnaround specialists AlixPartners to enact a cost saving plan however they are not engaged to develop a broad turnaround strategy for the company at this point.

Cash Burn is an Issue

The company also faces rising interest expense due to increased borrowing needs. Consensus estimates are for FCF of -$3.95 per share this year and capex of $775 million and -$1.87 per share and $650 million in capex next year. It recently accessed its $850 million revolver and will likely add further debt to finance its operations. At the end of last quarter, it had a debt to equity ratio of 94% and total debt to assets of 30%.

Sears Holdings Corporation (NASDAQ:SHLD) Facing Similar Issues

J.C. Penney Company, Inc. (NYSE:JCP) trades at just .26x sales and 1.07x book value. , another troubled retailers, trades at 1.84x book but at just .14x sales. Other similar retailers, in decent standing, trade in the range of 0.55x-0.65x sales. Sears is larger, with a market cap of $30 billion compared to J.C. Penney’s of $3.3 billion. It also has a higher level of debt with a debt to equity ratio of 114% but a total debt to assets ratio of just 10%. Recent return metrics are similar at both companies and both lost money in recent years.

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