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J.C. Penney burning through cash

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It was a tough quarter for J.C. Penney, according to Michael Binetti, executive director at UBS Investment Bank.

In the wake of an attempted transformation that failed to resonate with the department store’s traditional, price-sensitive shoppers, management is scrambling to cancel orders and cut exposure to misaligned categories such as chic home goods and trendy fashions. It has had to discount and offer coupons much more than anticipated, Binetti said.He looks for J.C. Penney to report same-store sales down 14 percent in the second quarter, but he predicts that those numbers will turn positive in the second half of the year—up 3 percent in the third quarter and 5 percent in the fourth.

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Binetti also expects the company to go through $910 million in cash between the second quarter and the end of the year. Until fundamentals improve significantly, he added, its equity value will diminish as the cash consumption pushes enterprise value up each quarter.

He recommends that investors reduce their holdings in the stock.

J.C. Penney reports second-quarter earnings Tuesday.

Disclosure: Binetti does not own shares of J.C. Penney.

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