Investors Shun J.C. Penney Shares

NEW YORK ( TheStreet) -- Investors shunned J.C. Penney's ( JCP) stock Friday following dismal earnings results and concerns over whether the company can regain the traction it lost even with the return of its former CEO.

Shares were dropping 3.2% to $18.19 at last check on Friday.

The stocks of Wal-Mart Stores ( WMT) and Kohl's ( KSS), were also slipping a day after both retailers reported first-quarter earnings that fell 0.9% and 0.3%, respectively. Shares of Sears ( SHLD) and Target ( TGT) were each in the green on Friday.

J.C. Penney said Thursday that it had a first-quarter loss of $348 million, or $1.58 a share. Net loss for the quarter totaled $289 million, or $1.31 a share when adjusted for charges related to the retailer's restructuring and management transition. J.C. Penney said restructuring charges were $72 million.

Sales at the Plano, Texas-based retailer dropped by 16.4% to $2.64 billion from year-earlier sales of $3.15 billion. Comparable-store sales declined by approximately 16.6%, fueled by the ongoing transformation of its home department, the company said.

J.C. Penney's gross margin dropped from 37.6% of sales to 30.8%, which was "negatively impacted by lower-than-expected sales, a higher level of clearance merchandise sales and a return to some promotional activity towards the end of the quarter," the company said in a statement.

Analysts seemed most concerned with the bigger-than-expected "free cash flow burn" the company went through in the quarter. J.C. Penney said last week, when it pre-announced its dismal sales figures for the quarter. that cash and cash equivalents were about $821 million as of May 4.

"We remain underweight and see further downside risk to the Street's 2013-2015 outlook," Morgan Stanley analysts Kimberly Greenberger and Heather Balsky wrote in a note Friday, in which they characterized the company's first-quarter "cash burn," as "worse than expected."

" Is JCP still deferring vendor payments to shore up cash?" the analysts wrote.

While inventory levels fell 9% from a year earlier, which was better than the nearly 17% drop in same-store sales, "merchandise payables rose 27%," they said.

"Typically, inventory and payables move in sync, suggesting JCP is delaying payments," the analysts wrote.

J.C. Penney's $821 million cash levels imply a $959 million cash burn, below the analysts' $1.2 billion estimate. The company boosted its cash by pushing into future quarters approximately $1.2 billion of liabilities, including $470 million of workers comp liabilities, $335 million of accrued capex and $355 million of deferred vendor payments, according to Morgan Stanley.

"This means JCP actually burned $2.1 billion, much worse than we thought. Inventory is expected to build over the next 6-9 months, further straining cash levels, in our view," the note said.

Wells Fargo Securities analyst Paul Lejuez said he believes the company will likely need liquidity in 2014.

"We believe JCP has been burned by the effects of a failed turnaround strategy," Lejuez wrote in a note Friday; Lejuezo has an underperform rating on the stock. "For JCP to get back to break-even from an EPS perspective, many things would have to go right, and there is no telling how long it could take. While liquidity is no longer an immediate issue, the company's turnaround is now solely dependent on its fundamentals, potentially a bigger problem."

J.C. Penney's underperformance reflects investor concerns that the company had faltered under the leadership of ex-CEO Ron Johnson, who chose to jettison the company's signature promotions in favor of "everyday low price." The move never resonated with customers, leaving the company and its stock price to suffer.

J.C. Penney replaced Johnson last month by bringing back Myron E. (Mike) Ullman as CEO, whose first order of business was to bring back sales and promotions.

"Our objective is to put J.C. Penney back on a path to profitable growth," Ullman said in his first earnings statement after being reinstated as CEO.

Ullman said on a conference call Thursday evening that another big initiative by the company is to bring its popular private-label brands that had been abandoned under previous leadership, such as St. John's Bay.

"The core of our business is the private label, private brand business," Ullman said on the company's earnings conference call. "We diminished several of the key brands during this phase and we lost a lot of traffic."

Ullman is targeting back-to-school sales as the company's first big test since taking over the company for a second time.

"We believe we will be in sufficient inventory position to vigorously compete. We're spending a lot of time making sure we get the merchandise in the stores ... getting the internet realigned, there's a lot of moving parts," Ullman said. It's a seven-week span and "I would expect us to be ready to compete across the board."

PiperJaffray analysts Alex Fuhrman and Neely Tamminga kept their hold rating on the stock given JCP's iconic brand name and the potential for "significant upside" to earnings estimates in the fourth quarter.

"Additionally, we believe continued media speculation of a buyout could limit downside," the analysts wrote in a May 17 note.

-- Written by Laurie Kulikowski in New York.

To contact Laurie Kulikowski, send an email to: Laurie.Kulikowski@thestreet.com.

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