J.C. Penney: Perfect Storm

 | Feb 28, 2013 | 9:00 AM EST  | Comments
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Yesterday, J.C. Penney (JCP) reported its fourth-quarter fiscal earnings (ended Feb. 2, 2013) and it was like some kind of perfect storm, sweeping hapless investors out to sea and battering the coastline. If management cannot right the ship soon, concerns about the company's balance sheet are going to push this stock into the single digits.

When you look at the press release you feel like the Governor surveying a disaster zone. Yeah, it's that bad. There's wreckage everywhere. JCP missed fourth-quarter estimates by $1.78 a share. The fourth-quarter was a total loss. The company reported a loss of $1.95 a share on revenue of just $3.88 billion, down 28.4%. By my calculation, that's the lowest level of fourth-quarter sales since the 1980s. Even sales on JCP.com were down 34.4%. How did that happen? I can understand consumers not shopping the stores, but customers wouldn't even buy on the company's website. And that was during the holidays! Holy cow, do these guys have problems.

Same-stores sales declined 31.7%. Gross margins were 23.8%, down 640 basis points, year-over-year and down a staggering 850 basis points sequentially. The fourth quarter was the seventh quarter of missed revenue estimates. Yikes!

But missed estimates and lower gross margins are only part of J.C. Penney's problems. Cash flow has taken a hiatus. Operating cash flow declined by 40%. Free cash flow was a negative $906 million. Negative! A retailer can't have negative cash flow after the biggest quarter of the year. That's un-American.

Vendor payables increased 13% on a 20% drop in inventory. All told, that means the company is hoarding cash and slowed down payments to its vendors. Cash on the balance sheet ended the year at $930 million, down 38%.

For the year, JCP lost $985 million on $12.9 billion of sales. While the management team begs investors for patience, investors have begun to freak out about the balance sheet. There are signs of stress everywhere. The back-to-school season is only five months away and the company has to figure out how to pay for the merchandise while it continues to pay for its transformation. Back-to-school is really management's last chance to show some growth. In my opinion, JCP is a single-digit stock. Don't get washed out to sea waiting for your ship to come in.

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