J.C. Penney Company, Inc. (JCP): Can Anybody Spare $1 Billion for This Stock?

There was no shortage of bad news for troubled retailer J.C. Penney Company, Inc. (NYSE:JCP) last week. On Monday afternoon, the company parted ways with embattled CEO Ron Johnson, bringing back his predecessor, Mike Ullman: a man they had pushed out less than two years before. By the end of the week, several other top executives recruited by Johnson had left the company. Later in the week, news outlets reported that — despite the return of coupons and other discounts — same-store sales were on pace to decline by double digits for the fifth straight quarter.

Most important, The Wall Street Journal broke the news last Thursday that J.C. Penney Company, Inc. (NYSE:JCP)was working with The Blackstone Group L.P. (NYSE:BX) to raise $1 billion to improve liquidity. Moreover, J.C. Penney Company, Inc. (NYSE:JCP) stated early this week that it had drawn $850 million on its credit line to fund inventory purchases and capex. The rapid deterioration of J.C. Penney Company, Inc. (NYSE:JCP)’s credit metrics and share price will make it very difficult for the company to secure more permanent financing on reasonable terms. Furthermore, the company is burning cash so quickly that another $1 billion will only buy it a year or two to recover from the Ron Johnson era. As a result, I think investors would be wise to continue to stay far away from J.C. Penney Company, Inc. (NYSE:JCP) stock.

Bleeding cash
While J.C. Penney Company, Inc. (NYSE:JCP) ended the fourth quarter with $930 million of cash and cash equivalents on its balance sheet, I wrote last month that the company was likely to burn through most of this cushion in the first quarter. Since J.C. Penney is already drawing $850 million on its credit line to fund working capital needs, it appears that I understated the severity of the problem.

New CEO Mike Ullman may want to save money by cutting back on capex (which is being used to build out mini-shops within many J.C. Penney stores), but he has limited flexibility to do so. Due to Ron Johnson’s gung-ho attitude, many J.C. Penney stores are in the middle of major renovations to build out the new Home section. Of three J.C. Penney stores I visited several weeks ago, two had significant ongoing construction. In one case, nearly a quarter of the store’s total floor space was closed off with plastic tarps.