J.C. Penney stock is getting pounded this morning based on a nasty report from Goldman Sachs.
The bank rated the retailer’s stock an “underperform” based on its reasoning that the company needs to take on more debt to keep cash flowing.
The stock is down 9% on the day and continues to fall.
At the heart of this problem, says Goldman, is the fact that JC Penney is rebuilding its inventory. When former CEO Ron Johnson tried to change the face of the company, he started doing so by getting rid of a bunch of the classic brands that customers love.
Now new CEO Mile Ullman is trying to get those brands back in stores (and in time for the holiday season). This costs money that, according to Goldman, JC Penney won’t have unless they raise some capital.
It doesn’t help that the bank sees weak 2013 holiday sales in the company’s future as well.
We expect the company to burn in excess of $US300mn of cash from inventory investment in 3Q as it rebuilds its private label inventories, which would bring the company closer to what we view as a minimum threshold for cash for JCP: $US500mn. Management indicated at the end of 2Q that they were approximately halfway through the process of rebuilding their inventory. For 3Q, we estimate comparable store sales of -3% and gross margins of 30%. This, combined with capital expenditures of $US200mn, would cause cash to fall to $US755 from $US1.535bn at the end of 2Q…
Looking ahead, we forecast gradual improvement in comparable store sales. Even in this scenario, liquidity again becomes challenged in 3Q 2014. As a result, we expect the company to raise incremental capital through a number of potential liquidity levers to keep liquidity at acceptable levels over the next twelve months.
Back in August when the company announced earnings, CEO Mike Ullman admitted that capital expenditures of $US439 million were high for Q2, but said that after that, capex would decrease to $US300 million in 2014 even though for the last 5 years, the company has spent over $US700 million on capex annually.
In Goldman’s view, even that $US300 million number is too high, and is going to force the company to raise some serious cash.
Here’s what the stock is doing right now.