August 13, 2013 6:18 pm

Lossmaking JC Penney grapples with cash- draining crisis

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If JC Penney is still burning through cash at the rate analysts estimated in the past quarter, its money pile will have fallen by another $66m in the five days of boardroom fireworks sparked by Bill Ackman.

The resignation of Mr Ackman, the activist head of the Pershing Square hedge fund, ended the melodrama on Tuesday, but left the lossmaking department store facing exactly the same problems it was struggling with beforehand.

Chief among them is the speed at which it is spending cash, which has made investors nervous about its liquidity and its ability to keep paying its bills.

In the quarter to the end of July, for which it will report results on August 20, analysts estimate that it burnt through $1.2bn in cash, while the company recently said it had $1.5bn of cash on the books.

JC Penney last week denied a media report that one lender had stopped financing deliveries from small manufacturers to its stores, but executives and Wall Street know that if vendor jitters are not calmed they can doom a retailer.

Mike Ullman, the JC Penney chief executive who Mr Ackman ousted once in 2011 and has failed to oust for a second time, has won plaudits for bolstering the balance sheet with new loans since he was rehired in April.

The cash burn is also probably slower today than it was a few weeks ago. Then Mr Ullman was finishing the renovation of JC Penney’s homeware section, a project started by Ron Johnson, the leader who Mr Ackman disastrously picked from Apple.

But JC Penney’s balance sheet is weakened further every day that the retailer’s sales fall short of its expenditure and the previous year’s revenues, extending a dismal run that began in February 2012 under Mr Johnson.

Stacey Widlitz of SW Retail Advisors said JC Penney’s short-term survival was not in doubt, but the company needed to improve performance quickly. “You don’t have three years to turn this thing around. Six months from now vendors will be looking at what’s going to happen in a year’s time.”

Mr Johnson alienated JC Penney’s core Middle American customers by scrapping price discounts and introducing younger, trendier merchandise. Mr Ullman is trying to reverse many – though not all – of his decisions, but for now the stores still bear a large Johnson imprint.

Analysts estimate that JC Penney’s like-for-like sales in the quarter to July fell by anywhere between 5 per cent and 15 per cent from a year ago, when they were down, in turn, by nearly 22 per cent from 2011. From February to April sales fell and the retailer posted a loss of $348m.

Unfortunately for Mr Ullman, the costly new homeware departments do not appear to have been a hit with customers, according to analysts’ anecdotal evidence, and have been criticised for odd choices of merchandise and layout.

Mr Ullman’s defenders say he should be given until the end of the year so he can try to make a positive mark on JC Penney during the crucial Christmas shopping season.

Liz Dunn, analyst at Macquarie, said: “All the changes he’s making he’s needing to do in a capital-lite way . . . So to the extent they need more inventory, they have to be more judicious”.

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