J.C. Penney Company, Inc. (JCP), Goldman Sachs Group, Inc. (GS): Weak Results Support the Bankruptcy Thesis

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However, investors should remember that J.C. Penney reintroduced sales and coupons before the beginning of last quarter. Furthermore, construction activity was lower than in previous quarters, particularly after the new home sections opened in early June. None of these “improvements” were sufficient to prevent a sixth consecutive double-digit decline in quarterly sales. J.C. Penney may be able to return to sales growth next year, but double-digit growth is just wishful thinking at this point.

Scrambling for viability
J.C. Penney is currently on pace for revenue of approximately $12 billion this year, down by more than $5 billion from fiscal year 2011. At this level of revenue, the business is probably not viable. On the company’s earnings call, CFO Ken Hannah stated that J.C. Penney is hoping to eventually return to its historical gross margin level of 37%. With $12 billion of revenue, that would produce $4.44 billion in gross margin dollars.

In fiscal year 2011 — before the “transformation” — J.C. Penney Company, Inc. (NYSE:JCP) incurred operating expenses (excluding one-time items) of $5.7 billion. The company has since reduced expenses by around $700 million, net of various investments. J.C. Penney’s search for liquidity has also increased interest expense to roughly $400 million annually. As a result, with annual sales of $12 billion, there is a gap of nearly $1 billion between gross margin dollars and expenses, even if J.C. Penney returns to historical gross margin levels.

In order to reach breakeven at historical gross margins, revenue would have to increase 20% to 25% from current levels. In other words, $14 billion to $15 billion is the minimum level of sales for J.C. Penney to remain a viable business based upon its current footprint.

It looks increasingly unlikely that J.C. Penney will make it to that level before its cash hits a dangerously low level yet again. With nearly all of the company’s assets already pledged as collateral and the stock price having slid to multiyear lows, J.C. Penney Company, Inc. (NYSE:JCP) will have a hard time raising debt or equity. As a result, bankruptcy could be in the cards for this storied retailer two to three years from now.

The article J.C. Penney: Weak Results Support the Bankruptcy Thesis originally appeared on Fool.com and is written by Adam Levine-Weinberg.

Fool contributor Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool recommends Goldman Sachs.

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