In an apparent effort to lessen the shock value of their official earnings release next week, J.C. Penney (JCP) announced select results from their first quarter last night. There isn't enough lipstick in the world to conceal the porcine nature of the data.
Revenue for the period was $2.64 billion compared to $3.15 billion in the same period last year. Same-store-sales dropped 16.6% versus expectations of -13.2%. Most jarring of all is that JCP somehow managed to burn through $959 million in cash due to ongoing remodel expenses and the top-line shortfall.
Without the $1.75 billion loan JCP secured last month, the company would be in serious jeopardy. With the loan, the company has bought itself some time. Whether or not it's enough to complete the turnaround depends on how JCP spends the money. In the attached video Yahoo! Finance senior columnist Mike Santoli and I discuss JCP's chances of survival.
Santoli makes the observation that "under a normal situation" in which a fresh CEO came in to fix an organization, JCP's numbers could be dismissed as the result of Ron Johnson's ineptitude. Unfortunately JCP didn't hire an outsider but instead brought in Johnson's predecessor. The move implies JCP wants to go back to the way things were.
Two problems with going back to J.C. Penney's 2010 strategy: 1) It's not an option, as all the customers have been lost and half the stores have been remodeled; 2) Even if it were an option, JCP under Ullman was terrible.
JCP's last best shot at survival is to finish the store remodels and split into separate operations. JCP's apology ads were great, but they continued Johnson's practice of over-promising to customers. The shoppers Johnson targeted never showed up and the old ones are going to need more than nostalgic ads.
Santoli will settle for almost any firm plan. "Honestly I feel like they have to come out with a more articulated strategy on the storefront as opposed to 'we have a new ad campaign and we're going back to the way it was.'"
The clock is ticking. Santoli rightly questions whether or not JCP is going to be culturally or operationally capable of anything as radical as splitting into two operating divisions that serve two different customer bases.
It's a good question and JCP has another year to come up with an answer. As for the stock, everything but a flat-out collapse seems to be priced into the numbers. For a trade, JCP stocks may work thanks to its liquidity lifeline and huge shortbase.
For long-term investors, the best fundamental case for shares of JCP remains a vague hope that things can't possibly get worse.
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