J.C. Penney Company, Inc. (NYSE:JCP) continues to be batted about by hedge funds and analysts. This time a report from Goldman Sachs sent shares down 13 percent during the trading day on Wednesday, giving the hedge funds which have bought shares a major beating. The firm rates the chain as Underperform because it believes that it must take on more debt in order to continue the cash flow.

J.C. Penney

J.C. Penney faces cash flow problems

According to analysts at Goldman Sachs, one of the things causing big cash flow problems at J.C. Penney Company, Inc. (NYSE:JCP) right now is the fact that the company has to rebuild its inventory. One of the things former CEO Ron Johnson did while running the department store chain was replace some of the brands the chain’s then-customers loved.

Unfortunately for J.C. Penney, the customers didn’t like the new inventory Johnson brought in or the new “everyday low prices” strategy he adopted for the company. Now previous CEO Myron Ullman is left to pick up the pieces, and one of the things he has to do is take the brands that Johnson dumped and get them back in the company’s stores in time for the holiday shopping season.

J.C. Penney needs to raise more capital

According to Goldman Sachs analysts, this will take cash that J.C. Penney Company, Inc. (NYSE:JCP) just doesn’t have—unless it raises more capital. They believe the retail chain will burn more than $300 million on inventory investment during the third quarter in order to rebuild its private label inventories. They said this will bring the retail chain to a cash level of about $500 million, which they view as being the minimum cash threshold for the company.

The analysts note that at the end of the second quarter, the retailer said it was about halfway done rebuilding its inventory. They expect to see comparable store sales decline by 3 percent and post gross margins of 30 percent. When combining these numbers with $200 million in capital expenditures, the company’s cash falls to $755 million from $1.535 billion at the end of the second quarter.

JCP-Goldman-Report: PDF.