J.C. Penney Company, Inc. (NYSE:JCP) confirmed this morning that it has drawn on its revolving credit facility. Specifically, the $850 million amount drawn is above some expectation for a $500 million 1Q drawdown, but J.C. Penney Company, Inc. (NYSE:JCP) CFO, Ken Hannah states in the release that the “amount provides more than their current funding needs to ensure continued liquidity. New CEO Mike Ullman needed to move swiftly to shore up the balance sheet given an estimated $750M-$800M cash burn this quarter ($200M of net losses and $500M-$600M of cap-ex and inventory) and in an effort to make vendors more comfortable accepting orders for the 2013 holiday period.
Near-Term Dilution Likely Off the Table, For Now
David Einhorn's Greenlight Capital was down 0.1% for the first quarter, underperforming the S&P 500's 6.2% return. In their letter to investors, which was reviewed by ValueWalk, the Greenlight team said a lot happened during the first quarter even though they made just a handful of changes to the portfolio and essentially broke even. Q1 Read More
In Deutsche Bank’s view, this morning’s action suggests that J.C. Penney is unlikely to conduct a very dilutive financing transaction in the near-term (recall, it had been reported various PE shops would consider purchasing an equity stake at a significant discounted price), a modest positive for the stock. However, DB believes that J.C. Penney needs a longer-term capital solution is still needed as they project (1) losses of ~$500M from 2Q-4Q, (2) another $200M in cap-ex related to maintenance, modest remodeling, and IT (for a total of ~$700M this year), and (3) peak seasonal working capital needs (during 3Q) of approximately $600M-$700M. J.C. Penney continues to explore capital raise options, which they believe are most likely going to take the form of a secured loan (backed by assets – both real estate and inventory), a preferred equity convert, or to a lesser extent, the sale of an equity stake.
Piper Jaffray lowers estimates
Piper Jaffray now expect comparable sales to be down 13% in Q1, and believe J.C. Penney Company, Inc. (NYSE:JCP) will likely burn in excess of $1.0 billion in free cash flow in the first quarter of the year.
Piper lowered their EPS estimates as follows: from $(0.67) to $(0.92) in FQ1; from $(2.60) to $(2.95) in FY14; from $(1.42) to $(1.55) in FY15; and from $(0.77) to $(0.84) in FY16. Their lower estimates for Q1 reflect a 13% decline in same-store sales and a gross margin of 32.5%, down 510 bps y/y.
JCP catches a break
On Friday (4/12/13), Justice Jeffrey Oing refused to grant Macy’s an injunction that would prevent JCP from selling private brand home goods designed by Martha Stewart. This is a positive outcome for J.C. Penney Company, Inc. (NYSE:JCP), and the company will be able to proceed with its May home department relaunch as planned, which will feature Martha Stewart-designed goods sold under the “JCP Everyday” label.
Macy’s plans to appeal the ruling and JCP could still lose the full trial and face costly damages. One motivation for the judge in this ruling was likely to allow the companies more time to settle out of court. Analysts estimate JCP was holding approx. $100M worth of Martha Stewart-designed inventory that it may have been prevented from selling. JCP’s new CEO Mike Ullman may be more willing with Macy’s to seek a settlement and move past this issue.