Should Investors Worry About J.C. Penney's Debt?
J.C. Penney's (NYSE: JCP) stock recently stumbled after Reuters claimed that the retailer "hired advisors to explore debt restructuring options." The report, which cited people "familiar with the matter," called the move a "high-stakes attempt to get its financial house in order" before its debt of nearly $4 billion matures within the next few years.
J.C. Penney issued a press release to counter Reuters' report, stating that its liquidity was strong, that it had "no significant debt maturities coming due in the near term," and that it hadn't hired any advisors for an "in-court restructuring or bankruptcy." J.C. Penney also stated that it "routinely" hires external advisors to evaluate opportunities for the company.
Image source: JCPenney.
J.C. Penney's debt load isn't fresh news for its investors, many of whom were already burned by the stock's 90% decline over the past three years. But its ability to manage that debt remains uncertain as its comparable store sales wither and its losses widen. Let's take a closer look at J.C. Penney's debt, and whether or not it can tame that unruly beast.
The key numbers
J.C. Penney held $3.83 billion in long-term debt at the end of the first quarter. That represented a 7% decline from a year ago, but a 3% increase from the fourth quarter.
Period | Q1 2018 | Q2 2018 | Q3 2018 | Q4 2018 | Q1 2019 |
|---|---|---|---|---|---|
Long-term debt | $4.14 billion | $3.96 billion | $4.04 billion | $3.72 billion | $3.83 billion |
Source: J.C. Penney quarterly reports.
Just $50 million of that debt matures this year, followed by $110 million in 2020 and $118 million in 2022. But in 2023, the company faces a whopping $2.08 billion in payments.
J.C. Penney finished the first quarter with just $171 million in cash and equivalents, down $10 million from a year earlier. Its free cash flow (FCF) improved $153 million annually to negative $268 million as it liquidated lower-margin businesses, cleared out inventories, and shuttered weaker stores -- but that figure must return to positive territory and rise significantly before it hits its wall of debt in 2023.
What's J.C. Penney's turnaround plan?
J.C. Penney's comps growth flatlined last year and stayed negative over the past three quarters due to sluggish mall traffic and competition from off-price retailers, superstores, and e-tailers.
Metric | Q1 2018 | Q2 2018 | Q3 2018 | Q4 2018 | Q1 2019 |
|---|---|---|---|---|---|
Comps growth | 0.2% | 0.3% | (4.5%)* | (4%)* | (5.5%) |
Source: J.C. Penney quarterly reports. *Shifted basis.
CEO Jill Soltau, who took the top job last October, is prioritizing the long-term growth of J.C. Penney's gross margins and FCF over its comps growth.
To do so, Soltau eliminated the company's lower-margin major appliance and in-store furniture categories, cleared out excess inventories (down 16% annually in the first quarter) to make room for new products, prioritized the expansion of higher-growth categories like home goods and apparel, and closed struggling stores.
Soltau is also developing new initiatives with LMVH's (NASDAQOTH: LVMUY) Sephora, which operates store-in-stores in about three-quarters of J.C. Penney's U.S. stores. Sephora's store-in-stores reportedly generate nearly five times as much sales per square foot than J.C. Penney's stores.
Image source: JCPenney.
J.C. Penney posted an adjusted loss of $147 million last quarter, compared to a loss of $69 million a year earlier. However, that wider loss was mainly caused by its liquidation of excess inventory and the elimination of its furniture and appliance units.
Excluding clearance items and the liquidation of those two units, J.C. Penney's gross margin actually expanded annually. It also stated that it would generate "positive" FCF for the full year, but didn't provide an exact forecast -- which leaves investors in the dark about its ability to survive beyond 2023.
So should investors be worried?
Soltau has made tough decisions and smart moves so far, but J.C. Penney could still be the next Sears. Unless it starts generating positive comps growth as it expands its total gross margins again, I'm sticking with my prior argument -- that its turnaround is stuck in the mud, and its long-term debt is still a ticking time bomb.
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Leo Sun owns shares of LVMH Moet Hennessy L.V. (ADR). The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
