The Real Question: Will J.C. Penney Shareholders Be Saved In Time?

Jan.16.14 | About: J.C. Penney (JCP)

We've been warning investors about the seriousness of J.C. Penney's (NYSE:JCP) cash flow situation for some time (click here for an in-depth cash-burn breakdown). It looks now that even in-line commentary about the company's holiday performance is being deciphered as underperformance.

J.C. Penney reported January 8 that the company is pleased with its performance for the holiday period, showing continued progress in its turnaround efforts. Customers responded well to the company's offerings this holiday shopping season, both in store and online.

J.C. Penney also reaffirmed its outlook for the fourth quarter of 2013, as previously set out in the company's third quarter earnings release dated Nov. 20, 2013.

Though comparable sales are very important (as in the analysis of any healthy retailer), in J.C. Penney's case (where survival is the more relevant consideration), we're more focused on the company's cash flow trends. Recent news about the intensity of promotional activity in retail this holiday season coupled with J.C. Penney's comments (above) suggests things may not really be going that well.

We can't take management's words at face value. If things were truly going well, there would have been at least one positive number in the press release (or some more color), offering the analyst community ammunition for the bullish case. There wasn't, and the market knows it. Though the firm hasn't disclosed any numbers at all, we can only fathom that cash flow was also weak this quarter.

Valuentum's Take

We're not at all interested in J.C. Penney's shares, and the news does little to change that. The question is not whether J.C. Penney can turn its operations around, but whether the firm can do it without wiping equity holders out completely first. Without details, we continue to believe the latter outcome is the most likely one. Our best ideas are included in the Best Ideas portfolio and Dividend Growth portfolio.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.