J.C. Penney Company, Inc. (JCP) Looks Like a Long-Term Bankruptcy Candidate

This loan will allow J.C. Penney to repay the $850 million it recently drew from its credit line, and it has also been used to pay off almost $250 million of debentures at a substantial premium to face value. These two actions will leave a little more than $1 billion to cover operating losses.

However, J.C. Penney did not generate any operating cash flow in 2012 — and is on pace for a similar performance in 2013 — yet the company plans to invest $1 billion in capital expenditures this year . In other words, the $1 billion cushion created by the recent loan transaction will only cover one year of negative free cash flow. After that, the company will need to raise more capital or dip into its revolving credit line again if free cash flow remains negative. This would lead to even higher interest payments, aggravating the company’s losses.

Summing it up
J.C. Penney Company, Inc. (NYSE:JCP) of today reminds me a lot of Rite Aid Corporation (NYSE:RAD) a few years ago. While Rite Aid has made a bit of a comeback in the last few years, it is struggling under a mountain of debt — totaling roughly $6 billion — that perennially hamstrings its profitability. As a result, Rite Aid’s equity is worth just 31% of the company’s total enterprise value (the other 70% represents the value of the company’s debt). To put it another way, the company is always one wrong step away from a trip to bankruptcy court.

J.C. Penney could face the same situation in five years. Even if Mike Ullman manages to win back lots of customers over that time period and the company approaches 2010 levels of operating profit, it may need to take out billions of dollars in debt to keep the ship afloat until then. That will burden the company with hundreds of millions of dollars in annual interest payments.

Any delay in returning to profitability would just add to those interest payments. As a result, J.C. Penney’s short-term problems have serious long-term implications. Its turnaround attempt may be an interesting story to watch over the next few years, but it’s not a good investment candidate. Given the company’s rapid cash burn and heavy debt load, any further mistakes could quickly send J.C. Penney into bankruptcy.

The article J.C. Penney Looks Like a Long-Term Bankruptcy Candidate originally appeared on Fool.com and is written by Adam Levine-Weinberg.

Fool contributor Adam Levine-Weinberg is long Oct 2013 $2.5 Puts on Rite Aid Corporation (NYSE:RAD). The Motley Fool recommends Goldman Sachs Group, Inc. (NYSE:GS).

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