Concerns emanating from the commercial lender CIT Group Inc. (NYSE:CIT) abrupt halt of deliveries to J.C. Penney Company, Inc. (NYSE:JCP)’s stores have been overblown, according to JPMorgan analysts.
Yesterday, J.C. Penney Company, Inc. (NYSE:JCP) denied rumors that CIT Group Inc. (NYSE:CIT) has pulled off support for small vendors, compounding a sharp drop in its same store sales.
The commercial lender CIT is popularly called a ‘factor’ and makes cash advances to suppliers based on the goods they sell to J.C. Penney. If suppliers stop shipping goods for want of advance from the factor, it would signal a death knell for retailers like J.C. Penney.
CIT concern valid, but overblown
Matthew R. Boss and team from JPMorgan Chase & Co. (NYSE:JPM) describe such vendor / factor discussions as a ‘normal course of business’ that could escalate into weaker sales and tighter credit.
With CIT Group Inc. (NYSE:CIT) factoring less than 4 percent of overall inventory for the year for J.C. Penney Company, Inc. (NYSE:JCP), and inventory being less than $200 million, the analysts feel the larger concern is reaction from the vendor community.
Based on their own calculations, J.P. Morgan analysts feel the P & L impact of AP tightening over 10 days would have an impact of $230 million, though CIT Group Inc. (NYSE:CIT) alone would not be a sole cause for such a huge impact.
JPMorgan analysts drew parallels to the CIT Group / The Bon-Ton Stores episode of 2008 when factors accounted for about 25 to 35 percent of The Bon-Ton Stores, Inc. (NASDAQ:BONT)’s inventory. Analysts recounted that The Bon-Ton Stores management successfully resolved the situation by posting about $30 million additional LCs for vendors, and negotiated to pay sooner in exchange for discounts.
Matthew R. Boss and team from JPMorgan Chase & Co. (NYSE:JPM) believe the cash burn for J.C. Penney Company, Inc. (NYSE:JCP) would be a combination of weak results and cash flow timing issues. The analysts predict J.C. Penney management’s update on August 20th will be key.
Uncertainty remains high
Paul Trussell and team at Deutsche feel despite J.C. Penney Company, Inc. (NYSE:JCP) denying CIT Group Inc. (NYSE:CIT) withdrawal rumors, uncertainty remains for the retail major, as the retailer’s slow paced turnaround is leading to a high rate of cash burn.
Deutsche analysts observe the retailer continues to burn significant cash and they forecast cash burn of about $1 billion in the second quarter. The analysts pegged the cash burn at $1.4 billion for the year. The analysts further point out that if J.C. Penney runs down 10 percent SSS and sees GPM falling 200 bps, the retailer’s cash burn would be roughly $1.85 billion.
Deutsche analysts have assigned a Hold rating on J.C. Penney Company, Inc. (NYSE:JCP) and set a price target of $18, from the current $14.60.