JC Penney (JCP) Plummets 15%; Analyst Warns Liquidity Problem

JC Penney Company (NYSE:JCP) suffered a steep decline after an analyst at Goldman Sachs Equity Research warned that the embattled century old department store chain is on the brink of facing liquidity problems, and it needs to incur additional debt to ensure that it has enough cash to keep its business operations going.

The stock price of the JC Penney Company fell by 15% to $10.12 per share on Wednesday. The stock lost 60% its value from its highest level at $27 per share over the past 52-week range

In a note to investors, Goldman Sachs analyst Kristin McDuffy emphasized that JC Penney  could experience liquidity problems in the third quarter due to a “combination of weak fundamentals, inventory rebuilding, and underperforming home department.”

McDuffy also wrote that JC Penney’s performance in the second quarter is not so good. The analysts said it is showing signs that its same store sales is weaker than expected, and increasing risk  of poor holiday season.“In order to safeguard against a potentially poor 4Q holiday season, it is likely that management will look to build a bigger liquidity buffer,” according to McDuffy.

The analyst estimated that JC Penney would burn $300 million cash on inventory investments in the third quarter. Its CEO, Mike Ullman is rebuilding the department store chain’s private label merchandises. McDuffy calculated that JC Penny’s minimum threshold for cash is around $500 million.

“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 $200mn, would cause cash to fall to $755 from $1.535bn at the end of 2Q…,” wrote McDuffy.

JC Penney Raising More Cash

Bloomberg recently reported that JC Penney is in talks with Goldman Sachs Group (NYSE:GS) to raise more cash. The bank previously helped the department store chain to obtain a $2.25 billion loan this year, and it is providing advice.

According to McDuffy, JC Penney can still pull some liquidity levers such as its real estate assets including the 240 acres vacant land surrounding its headquarter in Plano, Texas, and 30 automotive locations that are not included in its term loan collaterals. It can also monetize its eight regional mall partnerships.