Hedge fund manager Bill Ackman’s sale of his entire stake in retailer J.C. Penney Company, Inc. (NYSE:JCP), totaling 39.1 million shares, or 18% of the company, ends a contentious period in the company’s history. Ackman initiated the stake about three years ago and successfully pushed for a new CEO, former Apple executive Ron Johnson. Johnson embarked on an ambitious plan to remodel stores and introduce everyday low prices, which caused loyal customers to flee. Revenue fell off a cliff in 2012, sinking by nearly 25%.
Johnson was ousted in April of this year, replaced by former CEO Mike Ullman. Ullman now heads a company that lost nearly $1 billion in 2012 and almost $600 million in the first half of 2013. In April J.C. Penney Company, Inc. (NYSE:JCP) negotiated a $1.75 billion loan with Goldman Sachs in order to shore up its balance sheet and avoid defaulting on its debts, pushing the total debt past $5 billion.
The big question is this–can J.C. Penney Company, Inc. (NYSE:JCP) return to profitability before it runs out of money?
When J.C. Penney Company, Inc. (NYSE:JCP) shifted from discounts and promotions to everyday low prices, the company lost much of its loyal customer base. In May, after new CEO Ullman brought back promotions, J.C. Penney Company, Inc. (NYSE:JCP) launched an advertising campaign that essentially apologized for the previous changes and begged customers to come back.
The second quarter, while terrible compared to the prior year, did show some improvement sequentially. The second quarter saw comparable store sales improve by 470 basis points compared to the first quarter, and each month within the second quarter improved upon the last. In the earnings press release the company stated that it expects this trend to continue through the second half of the year.
Online sales were also encouraging. While sales were down 2.2% compared to the same period last year, sales were up compared to the first quarter, and again each month of the quarter improved upon the last. July sales were up over 14% compared to July of last year, a remarkable improvement.
Time is of the essence
Although sales trends are starting to improve, J.C. Penney Company, Inc. (NYSE:JCP) is on a strict timetable governed by its balance sheet. At the end of the second quarter the company had $1.5 billion in cash and cash equivalents, along with $5.7 billion in debt.
In 2012 J.C. Penney lost about $1 billion, and 2013 is on pace to be worse. Hopefully the new strategy and strong back-to-school and holiday seasons will improve the picture a bit, but I think it’s safe to say that losses will be at least $1 billion this year. At this rate J.C. Penney will run out of cash in about a year and a half. The increased debt level is also a problem. J.C. Penney is on pace to spend about $400 million per year on interest, making a return to profitability more challenging.
J.C. Penney needs to increase sales, plain and simple. Cost cutting cannot solve this problem, and the company needs to work hard to get customers back into stores. The progress so far is encouraging, but it’s unclear whether it will be enough. If the company had five years to pull this off I would be fairly optimistic. But that’s not the case. There’s still a chance that the company can right itself, but it’s a bit of a long-shot.
Don’t forget about the competition
Winning back business will be difficult for J.C. Penney. Kohl’s Corporation (NYSE:KSS), a company that I’ve written about before, has been consistently profitable over the last decade, with operating margins only falling below 10% in 2008 and 2012. The most recent quarter saw modest 2% revenue growth, and while earnings declined slightly on a per share basis, earnings actually increased.