J.C. Penney Denies Rumors of Accounting Irregularities - TheStreet

J.C. Penney Denies Rumors of Accounting Irregularities

The company rebuts talk of alleged improprieties in its Eckerd drugstores' Medicare accounts.
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Just as

Kmart

(KM)

disclosed it is cooperating with authorities over alleged accounting irregularities, Wall Street is becoming jittery over the finances of department store chain

J.C. Penney

(JCP) - Get Report

.

After the close of trading Friday, J.C. Penney put out a statement saying it "has been made aware of a number of rumors circulating in the market." The company said the "rumors are unfounded and without merit" and that it was "unaware of any investigation or unannounced litigation."

The statement was in response to rumors that had circulated in financial circles this week over alleged Medicare fraud at the company's Eckerd drugstore chain. The rumors drove J.C. Penney's shares down more than 8% in trading Thursday and Friday. Shares closed the week at $23.70.

In its statement Friday, J.C. Penney did not acknowledge that the rumors were related specifically to Eckerd. However, when asked directly by

TheStreet.com

about the Eckerd rumors on Thursday, J.C. Penney spokeswoman Stephanie Brown said she was not aware of any new investigation at Eckerd, which has come under government scrutiny before.

Penney's statement came in the wake of an announcement earlier Friday by Kmart that it had received an anonymous letter from a group of employees alleging accounting irregularities, and that it was cooperating with the

Securities and Exchange Commission.

Kmart's statement, in the wake of

Enron's

(ENRNQ)

collapse and accounting scandal, has heightened the fears of Wall Street over the quality of financial reporting.

According to a hedge fund source with extensive retail contacts, the Eckerd rumors began a few weeks ago. The hedge fund source, who requested anonymity, was told that a whistleblower in Florida, where Eckerd is based, brought the allegations to a U.S. senator, who in turn brought it to the attention of government regulators. (This source does not have a position in J.C. Penney stock.)

Contacted by

TheStreet.com

, spokespersons for Florida Democratic Sens. Bob Graham and Bill Nelson each said they were not aware of any investigation but would inquire within their respective offices.

It would not be the first time that Eckerd came under scrutiny by the U.S. government. In July, the drugstore chain entered a plea deal with the Department of Justice and agreed to pay $1.7 million for overcharging on Medicaid prescriptions. The government also filed a relatedcivil case in 1998, which is still pending, according to a spokeswoman at Eckerd.

Meanwhile, there is some evidence that vendors doing business with J.C. Penney are being turned down for financing from factoring companies, which provide credit to suppliers. Such rejections suggest Kmart's demise may have put the vendor community on heightened alert. Within the last few months, one executive at a Texas-based factoring company opted not to finance a $1.2 million shipment from an apparel company to J.C. Penney because the supplier could not obtain credit insurance. Trade credit insurance is often used by suppliers to protect themselves should a client fail to pay its bills, and factors often require trade credit insurancebefore extending financing.

Tightening credit terms or withholding credit insurance suggests vendors and insurers may be nervous about a company's financial situation. Kmart's financial demise -- which ended up in a bankruptcy filing on Jan. 22 -- was preceded by vendors tightening terms or demanding cash up front. The factoring company executive, who asked to remain unnamed, says many in the business are hoping to see encouraging signs that J.C. Penney's finances are solid when the company releases its quarterly results on Feb. 21.

Like Kmart before it crumbled, J.C. Penney is in turnaround mode. In 2000, it hired Allen Questrom, who whisked

Federated Department Stores

(FD)

out of bankruptcy in the 1990s, to revive its fortunes. A large part of the plan is touting the potential of Eckerd, which J.C. Penney bought in 1996 and by its own admission didn't run well. The Eckerd division, which runs more than 2,600 stores, lost about $600,000 last year on revenue of $13 billion.

Last year at a gathering of Lehman Brothers institutional clients, Questrom said Eckerd alone could be worth between $9 billion and $11 billion within three years, more than the entire company's current market capitalization of $6.25 billion.

J.C. Penney lost money last year, but Wall Street has latched on to the turnaround hopes. Shares rose 147% last year, and the company is expected to show a profit for the current fiscal year.

Indeed there are signs the company is doing well: Comparable store sales in its department store division rose 5.4% over the holidays, above plan and a stark contrast to Kmart's dismal performance over the same period.