Shares of J.C. Penney (JCP) are recovering today after plunging 10% yesterday on rumors that liquidity problems could end the struggling retailer's ability to get goods shipped to its stores. According to these unconfirmed reports CIT - the largest commercial lender in the U.S. apparel industry- has stopped financing deliveries from smaller vendors.
Typically a retailer of this size is able to buy inventory using credit then pay down the debt as sales are made. That ability to borrow is how retailers are able to keep enough product in the stores to meet demand for high traffic seasons like Christmas and still have money left for day-to-day operations.
If the rumors are true, J.C. Penney wouldn't be able to use these credit lines to buy products from smaller suppliers unless it used cash to do so. For a major retailer, financing is the canary in a coal mine. If lines of credit die it's a sign the merchant is in big, big trouble.
Early on Thursday morning, J.C. Penney issued a statement denying the report and claiming that the company expects to close the quarter with approximately $1.5 billion in cash on its balance sheet.
Unfortunately for investors and its employees, financing is only one of J.C. Penney's problems.
Closing arguments will be heard today in Macy's (M) lawsuit against J.C. Penney. Macy's is claiming that its contract with Martha Stewart (MSO) forbade J.C. Penney from creating Martha Stewart-branded stores within a store. A ruling on the case could come as early as next week.
For good measure, a Citigroup (C) analyst downgraded J.C. Penney to 'sell' from 'neutral' citing scant evidence of a sustainable turnaround, weak sales, and a lack of upside even if the company does manage to somehow stay in business.There are a lot of moving parts to the J.C. Penney story, none of which can be considered welcome news to the company as it attempts to regain its footing in the wake of the disastrous Ron Johnson era. Penney's may not be running out of money today, but the clock is ticking.
Of J.C. Penney's prospects OptionMonster.com's Jon Najarian has one question. "Are they going to sell cronuts? Because that might be the only thing that can save them." Trendy snack-pastries or not, Najarian thinks a year from now J.C. Penney will be little more than a distant memory or half the size it is today.
Retail is difficult to execute but not complicated to analyze. If you turn down all the noise and walk through most of the 1,000+ J.C. Penney stores around the country, you'll find a lot of chaos and not many customers. The most loyal Penney's shoppers have been alienated, and the younger customers the chain so desperately courted have yet to appear.
Current CEO Mike Ullman only took back the corner office in April but there's little evidence that he's been able to right the ship. Revenue for the quarter that ended July 31st are expected to be down more than 6% compared to last year and almost 30% lower than sales in the second quarter of 2011.
No retailers can survive a 30% drop in sales over the course of 2 years. Analysts are hopeful the rate of the decline in sales will stabilize by the end of the year but there's little to suggest that new customers are coming in or the old shoppers have learned to trust JC Penney again.
Liquidity and downgrades aside, J.C. Penney's biggest problem is that customers simply don't like what it's become. Until that changes the chain will be buying time, if not merchandise.
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