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Is There Any Hope for J.C. Penney?

Stocks in this article: JCP

Like Sozzi, there is a growing list of analysts who think the company will have to find funding in 2014 - especially if the company wants to still be around in 2015.

"We believe liquidity concerns could resurface in 2014 despite [approximately] $3 billion in capital raise over the last year," Sterne Agee analyst Charles Grom wrote in a Feb. 19 note in which he suspended his $3 price target until further clarity on the turnaround. "We estimate the company will burn through [approximately] $2.7 billion in cash in FY13."

Grom, who rates the company at "neutral," offered three scenarios of where the company could raise funds if necessary:

"We believe the company may be able to: (1) raise ~$500 million in debt through a term loan 2nd lien to its ABL or work with lenders to tap~$400 million through the accordion feature on its ABL; (2) sell non-core assets such as (a) its 240 acres of real estate (~$150 million est.), (b) ~30 unencumbered automotive/tire locations, & (c) its five mall JVs (~$100 million est.); (3) monetize its below market leases for an estimated $100-$200 million; (4) issue a convert, although unlikely given the stock's low market capitalization and extreme volatility, and/or (5) issue additional equity as a last resort if absolutely necessary. Regarding option five, if such an equity offering were priced at approximately $6 per share, we estimate that a ~$650 million capital infusion would be roughly 25% dilutive to existing shareholders.".

Looking ahead to the first-quarter, analysts are expecting yet another loss. J.C. Penney i s expected to lose $1.14 a share, according to the most recent Thomson Reuters estimates. As of right now, consensus estimates are calling for a loss of $3.07 a share for the coming fiscal year.

"We believe management will guide to positive EBITDA excluding pension on mid-single-digit comp growth and gross margin above 34% for the year," Goldman Sachs analyst Stephen Grambling writes in a Feb. 24 note. "We are below this range as we remain concerned about JCP's comp recovery, which has underperformed peers that have reported 4Q to date. We also expect greater detail on the gross margin cadence throughout the year."

That said, Grom believes that J.C. Penney can eventually dig itself out of its hairy predicament, "but a significant change in comp trajectory needs to take hold."

"Sales per square foot likely need to be 25%+ above trough 2013 levels with gross profit margins in the 36-37% range and SG&A per squarefoot growth of only ~3%-6% vs. 2013. Importantly, we still view this as achievable, but believe thepace of recovery needs to accelerate soon, particularly given the weather/macro headwinds we areseeing throughout retail," the note said.

--Written by Laurie Kulikowski in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.
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