J.C. Penney's Comparable Sales Are Up, But Investors Flee

NEW YORK (The Deal) -- J.C. Penney Co. (JCP) said Tuesday that comparable store sales for the fourth quarter were up about 2%, disappointing investors and sending the stock down more than 10% in afternoon trading to close at just above $5 per share.

Analyst reports said that comparable sales in December alone were likely down 1%.

The Plano, Texas-based department store retailer, however, said it has total liquidity, including cash and availability on its revolver, of about $2 billion.

"While 2013 brought a lot of change and challenges to JCPenney, the steady improvements in our business show that the Company's turnaround is on track. In spite of the significant headwinds facing all retailers this season, including unprecedented harsh weather conditions in many parts of the country, we delivered on our promise to generate positive comparable store sales growth in the fourth quarter," said Myron (Mike) Ullman, J.C. Penney's chief executive, in a statement.

The difficulty for J.C. Penney at this stage is improving results quickly enough to effect a turnaround before it runs out of cash.

Margaret Taylor, an analyst at Moody's Investors Service Inc. said liquidity should be adequate to help J.C. Penney survive the year, though making it through the seasonal trough, in the summer to fall, when retailers stock up on inventory before the holiday shopping season, will be tight.

One source of additional liquidity for J.C. Penney, however, could be its warehouses and its distribution centers, real estate that it has yet to monetize, according to a source.

Two industry bankers said that in September they would have given 50% odds that the retailer would survive without having to file for bankruptcy protection, but they now think the odds have increased that it will have to file after December and January results are in.

A tactic that companies in J.C. Penney's position sometimes use is to file earlier than expected, giving them a larger cash pile to help with a reorganization effort. But if it hangs on until it's out of cash, liquidation becomes almost a certainty.

A question raised by industry observers, which seems unanswerable, is whether J.C. Penney decides to file earlier than expected, utilizing fully the cash on its balance sheet to reorganize in an attempt to emerge from bankruptcy, or hangs on until it is out of cash, a situation in which liquidation seems a certainty.

The company also has taken steps recently to make sure it is in a position to optimize its profits if its turnaround takes effect.

On Jan. 28, J.C. Penney said it had amended its shareholder rights plan to protect its more than $2 billion in net operating losses. The new plan dropped the threshold to 4.9% from 10% to comply with the definition of "ownership change" that applies to those kind of offsets to taxable income. An industry banker said that J.C. Penney could take advantage of the NOLs either in bankruptcy, as creditors could take on the tax credits, or if the retailer became profitable. The banker added that regardless it was a smart move, and did not necessarily portend a bankruptcy filing.

Last year, J.C. Penney was working with Goldman, Sachs & Co. when it arranged a new term loan for $2.25 billion and then raised about $930 million through a secondary share offering.

J.C. Penney said, in an e-mailed statement: "JCPenney reported today that, as anticipated, it closed 2013 with total available liquidity in excess of $2 billion. ... Furthermore, as stated in the Company's release today, we are encouraged by the Company's fourth quarter results and remain steadfast in our focus to build on these achievements and return to profitable growth. We are steadily growing our business, starting with comparable store sales growth in the fourth quarter - the first time the Company has posted quarterly comparable store sales growth since 2011 - and prudently managing our expenses, inventory and capital expenditures."

The company also said that it had cut its capital expenditure program for 2014 to $300 million, down from nearly $1 billion for the fiscal year ending Jan. 31, and $810 million the year before.

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