J.C. Penney Losing $500k Per Store In FCF: UBS

J.C. Penney Company, Inc. (NYSE:JCP) has difficulty staying out of the news lately. The latest development is an announcement by the company to cut jobs and close stores. But is that enough or are more closures and layoffs ahead at J.C. Penney Company? Michael Binetti of UBS Research weighs in the debate.

A Look at J.C. Penney Company, Inc. Store-Level Economics

In our view, without a significant improvement in the trajectory of the sales recovery in the next few quarters, J.C. Penney Company, Inc. (NYSE:JCP) could look to close more stores again. Based on our analysis below, we believe that JCP’s stores are currently losing $200k per store in EBITDA (excluding corporate expense allocation), and losing $500k in free cash per store per year.

We believe that lack of an update on same store sales trends in December for the first time since September suggests that sales are clearly not improving as fast as JCP (and some bull case scenarios) would’ve imagined (as indicated by the stock decline in -23% stock performance in January to date). And we don’t believe there is much opportunity for JCP to cut store-level costs to stabilize store profits— considering JCP pays only $4 per square foot in rent expense per leased square foot (per the company’s comments in 2012), and with the company already having cut significant costs out at the store level as sales worsened in 2012 & 2013.

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While we believe J.C. Penney Company, Inc. (NYSE:JCP) is pursuing its best course of action to turnaround company operations and improve its financial health, two years of inconsistent consumer messaging and $5B in lost sales has clearly eroded unit-level economics for the chain.

In our analysis above, we estimate that the average J.C. Penney Company, Inc. (NYSE:JCP) store is grossing ~$11M in sales (down from ~$16M in 2010) and is losing ~$200K in EBITDA per box (down from positive $2.1M per store in 2010). Importantly, with ~$300K in maintenance capital expenditures per store (we assume 1%-2% of sales), we believe many stores are free cash flow negative—we estimate the average store is losing ~$500K in free cash flow (down from positive $1.8M of free cash flow per store in 2010).