J.C.-Penney Ron Johnson

J.C. Penney Company, Inc. (NYSE:JCP)’s new (and old) CEO faces an uphill battle to turn around the struggling retailer, as declining liquidity, loss of customers, and damaged brand equity present massive hurdles. Ullman is already moving swiftly into action, immediately focusing on shoring up the balance sheet. Many investors believe the most likely options are for a combination of (1) a secured loan (backed by assets including inventory and real estate), (2) a preferred equity convert, and to a lesser extent (3) a sale of an equity stake (likely at a significant discount to current levels), that totals altogether the nearly $1 billion in financing which could stabilize JCP short-term. While the potential negative impact to shareholders through dilution and costly added debt should add pressure to shares.

J.C. Penney’s Balance Sheet Review

Analysts at Deutsche Bank state there is ‘little To No Cash Left, $1 Billion + Needed Adjusting for a deferred vendor payment, They note that J.C. Penney Company, Inc. (NYSE:JCP) entered FY13 with only  about $850M of cash. They model  approximately $200M in P&L in 1Q and $600M spent on cap-ex and inventory, as home (to open in 3 weeks) & Joe Fresh shops represented approximately 75% of the planned remodel work for this year.

By DB’s math, at least $1 billion is needed projecting (1) losses of around $500M from 2Q-4Q, (2) another $200M in cap-ex related to maintenance, modest remodeling, and IT (for a total of $700M vs. $850M they are modeling), and (3) peak seasonal working capital needs (during 3Q) of $600M-$700M.

Deutsche believes that while J.C. Penney is likely relying on its revolver ($1.8B available) currently, terms of any equity (potential 25%+ discount) or fixed income (HSD-LDD+ interest rate) transaction will be costly.

To raise this money a combination of key vendors, private equity, and large stakeholders is likely.

Ullman’s Next Steps After securing capital for J.C. Penney

DB looks for Ullman to (1) restore marketing to a combination of traffic driving events and overall brand building, (2) re-ticket prices of 2H13 goods, (3) ask vendors for additional assistance with promotions and markdown costs, (4) hold off on further shop installations and make a major reduction in cap-ex for FY14 (only minor cuts likely available for FY13), (5) addback some of the removed private label brands, and (6) close the bottom 10% of stores. On management, DB expects to see more departures than hires as external executives await to see signs of progress over next 6-12 months.