Will J.C. Penney File For Bankruptcy And When?

WYCO Researcher profile picture
WYCO Researcher
6.71K Followers

Summary

  • It has too much financial and operating leverage to stay out of Ch.11 bankruptcy.
  • Latest quarterly report showed vendors are becoming stricter with terms.
  • J.C. Penney has a long history of failed business plans, and the recent addition of selling appliances will be another failure.
  • Recent note tender offer was successful in reducing debt.

J.C. Penney Company, Inc. (JCP) will eventually file for Ch.11 bankruptcy, but not within the next 12 months, in my opinion. Nothing new here. It has too much debt, too many stores, and no inherent reason to exist. It sells functional products to the lower middle class. While its recent quarterly report shows that accounts payable/merchandise inventory ratio dropped to 0.303 from 0.342 year-end, indicating potential problems with vendors, it has no immediate "event" that would push it into bankruptcy this year.

My approach to this article is different than my usual style of only using numbers and legal issues for article content. Much of this article is focused on concepts and my perception of JCP, which I have followed since 1974 when we conducted an in-depth analysis comparing them to the "old" Sears (SHLD) in a class.

First Quarter Problems

The earnings report two weeks ago was a jolt to investors. Not only were the results worse than expected, but also management seemed too unrealistic in its near-term guidance. While same-store sales dropped 3.5% in the first quarter, management maintained its guidance of plus/minus 1% for the year. That implies that it is unrealistically expecting sales to increase over the next nine months. If the company orders too much based on this too rosy of forecast, it could end up with an overstock of seasonal merchandise that would require larger-than-normal end-of-season markdowns to get them off the shelves.

One of the most alarming metrics in the quarterly report was the accounts payable/inventory ratio, which is a critical retail industry metric showing its relationships with vendors. This ratio decreased to 0.303 from 0.342 year-end and 0.340 from the same period last year. This means that some vendors have shortened the due date period and/or are requiring payment upon delivery. This problem is also reflected

This article was written by

WYCO Researcher profile picture
6.71K Followers
B.A. in Economics; M.S. in Finance. I usually write about distressed companies and companies in Ch.11 bankruptcy. I am semi-retired after spending decades in investments.

Disclosure: I am/we are short SHLD. 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.

Additional disclosure: I am naked SHLD call options

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