J.C. Penney Company, Inc. (NYSE:JCP) is set to face a net liquidity gap of $761 million in 2014 as against $853 million surplus in 2013, according to a recent Citigroup report.

J.C. Penney

Deborah L Weinswig and Nathan Rich of Citi in their recent updated report on the department store retailer’s cash burn analysis highlights the retailer would end up with surplus cash in 2013, thanks to its tying up for term loan and revolver borrowings.

J.C. Penney downgraded by Citi

In a report last week, Deborah L Weinswig and Nathan Rich of Citi downgraded the retailer from Neutral to Sell as they felt the timeline for recovery had been pushed out until 2014.

The Citi analysts feel J.C. Penney Company, Inc. (NYSE:JCP) would have ample liquidity in 2013, thanks to the retailer tying up a $2,250 million term loan and $850 million in revolver borrowings. These facilities are expected to bridge the gap that might be caused by decrease in operating flow and increase in capex. The analysts feel the century-old retailer would end 2013 with $1,783 million of cash on its balance sheet providing ample liquidity to fund its operations.

2014 concern; 2015 cash crunch looms

The analysts concur that with no incremental debt financing, the retail major is expected to see a net decrease in cash to the extent of $761 million. The analysts feel investors will be concerned with such a huge cash burn in 2014.

Turning their attention to 2015, the analysts note J.C. Penney Company, Inc. (NYSE:JCP)’s cash level may deteriorate to below $500-700 million before the end of 2015. Citi analysts anticipate the department store retailer would most likely tap its credit facility to bridge its liquidity gaps, as the retailer would be running out of its options to tap additional debt financing in 2015.

Aggressive real estate valuation

Citi analysts termed Cushman & Wakefield’s valuation of the retailer’s real estate at $65 per square feet as aggressive, as the analysts feel $50 per square feet would be reasonable. The analysts estimate nearly 63 percent of total stores of the retailer are in C/D tier malls where their importance has seen a declining trend due to poor response in opening malls.

Fewer options left

Deborah L Weinswig and Nathan Rich of Citi believe the century-old retail major has limited options to raise additional capital, as their secured term loan hampers the ability to issue secured debt. However, the analysts feel the most likely source of liquidity for the retailer would be an additional drawdown on the revolver.

The analysts also note J.C. Penney Company, Inc. (NYSE:JCP) could issue convertible securities and preferred stock, though such options would be more expensive besides potentially diluting its equity holders’ interest.