The saga of J.C. Penney Company Inc. (NYSE:JCP) and JCP stock has been a bizarre one. Years before clothing retailers started getting destroyed by online competition, hedge fund manager Bill Ackman made a move on the company. He tried to reposition it by bringing in Ron Johnson, who had been credited with creating and executing the Apple, Inc. (NASDAQ:AAPL) store concept.
Out With the Old
The stores were redesigned and renovated, based on Johnson’s store-within-a-store vision. But the JCP stock price cratered and sales were clobbered because the popular discounting model was extinguished.
One of the things that got customers into the stores was that JCP, like many retailers, threw coupons around like confetti. The psychological effect of using a 15-25% coupon in a discount store could not be replaced.
So, Johnson got booted, Ackman exited his position, and the company was turned over to new management — just in time for brick-and-mortar retailers to experience body blows from online retail outlets.
Today, the JCP stock price is $3.91.
A Closer Look at JCP Stock
I don’t see bankruptcy as an imminent threat, and there is arguably a speculative value play here for aggressive traders.
Looking at JCP stock and financials from the macro level, things are actually somewhat stable. From fiscal year 2015 to FY17, total revenue actually rose about 2.5%, operating income went from a $254 million loss to a $395 million gain, thanks to big cuts in SG&A. A $717 million net loss was reversed to the point of break-even.
Free cash flow is still negative to the tune of almost $100 million, though, and cash on hand is down to $314 million. Long term debt is $3.84 billion, although debt maturities are not pressuring the company just yet.
For the first two quarters this year, there was a 2.4% decline in same-store sales, and net loss nearly doubled, from $124 million to $242 million. The good news is that operating cash flow improved from negative $208 million to positive $56 million. However, increases in capital expenditures (capex) pushed free cash flow into negative territory to the tune of $136 million.
As for bankruptcy, there is enough operating cash flow to pay $190 million in debt maturing in 2018, $175 million in 2019, and $400 million in 2020 without the need for much in the way of asset sales. The 2020 debt will likely require a refinance, though.
To the Future, and Beyond
Beyond this, in 2023, there is a $2.25 billion term loan. It will likely be refinanced, but JCP is sitting on real estate that can be conservatively valued at $2.25 billion that had been pledged to the lenders anyway.
It isn’t bankruptcy that is the real concern for me. It’s just that JCP stock will just fade slowly into obscurity and irrelevance, like other retailers. Comps will struggle and, perhaps, even accelerate lower. There’s no obvious catalyst to propel the company into growth.
What that means is that I don’t see JCP stock roaring to massive gains going forward. I only see a few near-to-medium-term catalysts that may make for an aggressive and speculative trade at these levels.
Trading JCP Stock
At $3.81 per share, there’s not a lot of downside in buying JCP stock, but that doesn’t mean downside isn’t possible. Presumably, buyers are hoping for:
1) Asset sales.
2) The company paying off debt.
3) A surprise bounce in same-store sales.
4) A merger.
Yes, it’s possible JCP could merge or be acquired. I think there is the slight possibility that Amazon.com Inc. (NASDAQ:AMZN) could buy the chain for its footprint. Unlikely, but possible. Another struggling retailer might try to join forces if the acquirer is cash rich and has some kind of vertical strategy.
I’d say there are other speculative plays out there that are better, but this might suit someone’s taste.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com. As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities.
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