Update: J.C. Penney's Earnings - Enthusiasm May Wane Quickly As Problems Persist

Aug.15.14 | About: J.C. Penney (JCP)


J.C. Penney reported a quarterly loss of $176 million on revenues of $2.8 billion.

The company is growing its sales but it is still saddled with debt, which is a problem I anticipated.

The company has thus far been able to avoid more dilution, which was another prediction I made earlier this year.

The company remains vulnerable in a fiercely competitive and tepid retail environment. Proceed with caution.

J.C. Penney (NYSE:JCP) just reported its quarterly results. The stock spiked more than 10% on the news in after-hours trade as panicked short sellers exited their positions. The stock now trades at $10.07/share or just 3.4% above its closing price. The initial pop was the result of better than expected earnings from the company, which lost $176 million or $0.56/share. The good news is that this is far better than last year's loss of over $600 million. The company also grew its sales by 5% and actually generated some operating cash-flow - $76 million.

However as I've pointed out in the past, the company still has significant issues that closing some stores and putting some items on sale simply cannot fix. The first is the company's enormous debt load. J.C. Penney has $5.3 billion in long term debt and this number has been climbing even as the company's sales have been improving. For instance at the end of the last quarter the company had $4.9 billion in long-term debt. Furthermore, while total shareholder equity is up year over year, keep in mind that the total number of shares outstanding has grown as well. Shareholder equity declined quarter over quarter from $2.75 billion to $2.6 billion.

Ultimately it is still too early to tell whether this is a dead cat bounce or whether the company is actually recovering. But keep in mind the following if you think this is a depressed asset worth betting on. First, the company cannot survive a recession, especially given its enormous debt load. Second, the company has only seen a 6% increase in same store sales after seeing a collapse, and this minor increase was at the company's best performing stores. Finally, the company is still losing money and eventually it will have to either issue debt or stock if this continues. Given the company's debt load and the fact that it is losing money this will likely be debt. Given these points, and given the stock's rebound over the past few months J.C. Penney is far too risky for now.

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