J.C. Penney Company, Inc. (NYSE:JCP) stock jumped from $8.37 to $9.73 last week after the retailer reported better than expected 1Q earnings, but sentiment is moving against it once again and its surge has been almost completely rolled back. Good news aside, J.C. Penney’s capital structure is still a mess, free cash flow is unlikely to match guidance, and even with the new $2.35 billion ABL credit facility dilutive equity issuances could become necessary.

J.C. Penney Company JCP

Potential dilutive offerings in 2015, 2016: BMO

“We see the potential for one or two dilutive equity offerings in 2015/2016 to help clean up the company’s highly leveraged capital structure,” writes BMO Capital Markets analyst Wayne Hood, who rates J.C. Penney Company, Inc. (NYSE:JCP) Underperform with a $5 price target. “We estimate a $950 million transaction in 2015 could reduce the company’s net debt/EBITDAR to 7.64x in 2015, still well above those in its peer group and non-investment grade.”

Hood isn’t completely dismissing the improvements that J.C. Penney Company, Inc. (NYSE:JCP) has shown so far this year, and he has increased his 2014 EPS estimates from a $3.54 loss to a $2.54 loss, but that’s not enough to get him onboard with the bulls. Right now, J.C Penney still has a net debt/EBITDAR of 14.2x and Wayne Hood thinks that capital spending will have to increase in 2016, since it can’t continue at 40% of D&A forever. Management’s guidance for breakeven free cash flow by the end of this year is also very optimistic considering J.C. Penney’s previous track record and the headwinds facing many retailers.

Breakeven FCF would require incredible comps and gross margin growth

Based on capex guidance, J.C. Penney Company, Inc. (NYSE:JCP) will need to generate $250 million in cash from operations this year, which Hood estimates would require 10% comp gains and 950bp gross margin gains for the rest of the year, compared to 6.2% comp gains in the first quarter and a gross margin gain of 224 bp. Dropping the comps to 8% growth would require better gross margins than J.C. Penney has ever achieved, even in its heyday. Conditions are improving, but not nearly fast enough for J.C. Penney to stop burning money this year.

Hood estimates that the retailer will lose $225 million cash from operations and spend another $255 million on capex for a 2014 cash burn of $480 million. With the extra debt burden,J.C. Penney Company, Inc. (NYSE:JCP) could start to face liquidity concerns once again, potentially prompting the issuance that Hood warns about.