J.C Penney Co. Inc. (JCP) continues to face unprecedented drops in traffic and sales that, to some extent, caused its largest shareholder Bill Ackman to sell his 17.7% ownership at a massive loss. And there is not a single reason to believe that this revenue drop will reverse itself. J.C. Penney has been through two cycles of management, pushing out CEO Myron E. Ullman III in late 2012 and replacing him with Apple Inc.'s (AAPL) Ron Johnson, only to bring back Ullman at the start of this year. It will take another several months to get a new chief executive officer. In the meantime, J.C. Penney's balance sheet will be sucked dry of cash.
The retailer has one option, which is to do something unprecedented in its modern history -- put every item at J.C. Penney on a "buy one, get one free" sale in September and hope for a surge of traffic. This would include everything from pajamas to watches. To extend the stampede, J.C. Penney can give every customer who buys something a 25% off coupon for any item bought during the holiday period, which now apparently begins as early as the first of October. The coupon program should bring in another stream of customers in the fourth quarter.
J.C. Penney shares what the other doomed large U.S. retailer -- Sears Holdings Corp. (SHLD) -- does. Its stores are ancient. It is caught between better run companies with stronger balance sheets, with Wal-Mart Stores Inc. (WMT) and Target Corp. (TGT) on the one side, and Costco Wholesale Corp. (COST) and department store leader Macy's Inc. (NYSE: M) on the other. J.C. Penney and Sears not only lack the capital to upgrade locations, they lack the time.
J.C. Penney's same-store sales fell between 20% and 25% a quarter last year when compared to the same quarters in 2011. In the first quarter of this year, the drop continued at a rate of more than 15%. The fourth quarter, which is the most important for almost every retailer, is only weeks away. J.C. Penney cannot afford another holiday cycle in which its competitors steal share.
Goldman Sachs Group Inc. (GS) and others have put $1.75 billion in the J.C. Penney bank account and claimed that it "enhanced its liquidity by entering into a $2.25 billion senior secured term loan facility." Ullman said that he "expects to end the year in excess of $1.5 billion in overall liquidity." The language was a bit vague, but based on J.C. Penney's past cash burn rate, it appears to be a positive development.
What would a "buy one, get one free" program cost J.C. Penney? Its revenue run rate was $875 million a month in its most recent reported quarter. Is the risk to J.C. Penney 100% of that number? Almost certainly not. Some customers continue to come to J.C. Penney regularly, whether or not the retailer deserves it. A "buy one, get one free" sale most likely would sharply improve revenue temporarily. It is better to look at J.C. Penney's "costs of goods sold," mostly a measure of what it pays for inventory. The run rate per month for that number in the most recent quarter was $600 million. J.C. Penney's largest risk is that this number would go up with a crush of new customers. So, the risk is into the hundreds of millions of dollars, brought down by the revenue from the increased sales.
Desperate times have always called for desperate measures. J.C. Penney can act desperately, and potentially do what almost no on thinks it can -- save itself.
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