Breakout

J.C. Penney Shares Whipsaw as Debt Concerns Grow

Jeff Macke
Breakout

J.C. Penney (JCP) may not be dying but they sure do act like it. In response to shares dropping more than 25% on rampant speculation that that the company has severe liquidity problems, J.C. Penney announced the following in a press release this morning:

In response to inquiries, JCPenney said today that it is pleased with its progress thus far in the Company's turnaround efforts and the traction its initiatives are starting to achieve. Moreover, the Company said it is starting to see greater predictability in its performance across many areas.

The Company continues to be encouraged by improvements in purchase conversion both in store and on jcp.com, primarily due to being back in stock in key items and sizes the customer expects to find at JCPenney. Overall sales on jcp.com continue to trend double digits ahead of last year.

The Company still anticipates it will experience positive comparable store sales trends coming out of the third quarter and throughout the fourth quarter of 2013.

There's been quite a bit of chatter regarding J.C. Penney over the last few weeks, but none of it has been about the online sales performance of JCPenney.com, which was highlighted in the press release above. What Wall Street has been debating is whether or not J.C. Penney has enough money to survive through Christmas. Concerns were sparked yesterday in response to Goldman Sachs (GS) issuing an "underperform" rating on existing J.C. Penney debt.

Recall that Goldman had helped J.C. Penney raise more than $2 billion already this year. Leaving aside Goldman's involvement in both the selling and subsequent downgrading of J.C. Penney debt, it's fair to say investors think Goldman has a good grip on J.C. Penney's fundamental condition.

Related: Tragic J.C. Penney Story Gets a Touch of Disney Magic

The question on the table isn't whether or not JCP.com is having a good quarter. The question is whether or not J.C. Penney the corporation is going to be able to avoid bankruptcy.

"They really have a very short period of time to turn it around," says Barry Ritholtz, editor of The Big Picture blog and CIO of Ritholtz Wealth Management. "You have to have the confidence of your suppliers and the people who lend you money, otherwise you're in trouble." It's not clear how close J.C. Penney is to the dreaded Retail Death Spiral, but Wall Street seems to believe their balance sheet has gotten worse over the last six months.

As Ritholtz says, J.C. Penney's survival depends to a large degree on the confidence of its vendors and finance partners. This morning's press release only made matters worse on that front. J.C. Penney knows Wall Street thinks the company is in trouble. To call attention to JCP.com sales only fans the speculative flames.

Everyone already knows J.C. Penney's core operations are going to be shaky until it can regain some of the customers it lost over the last few years. The company needs to demonstrate it has a clear vision of where it's going, and the leadership to hold things together until it can execute a plan.

When former CEO Ron Johnson left the company in shambles the board brought back former CEO Mike Ullman on a temporary basis. Ullman is respected on the Street but he's not the long term solution. J.C. Penney needs to bring back cash-strapped customers in a tough economy while warding off the creditors at the door.

Related: J.C. Penney Replaces Bill Ackman With a Hedge Fund Dream Team

If it's going to pull out of the death spiral, J.C. Penney must hire a CEO that Wall Street believes in and they need to do it now. The stock may rise and fall, but the future is grim over the intermediate term. It's going to hurt to pay for top talent so soon after paying Ron Johnson over $50 million to run them into the ground, but their survival depends on it.

As it stands J.C. Penney is running out of ideas and altitude. It's only a matter of time before they crash.

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