MT Insider: JC Penney's Positive Comments for Second Half of 2013 Still Leaves Questions for Investors

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In a release out this morning, JC Penney ( JCP ) said it "anticipates it will experience positive comparable store sales trends coming out of the third quarter and throughout the fourth quarter of 2013."

However, investors are still guarded on the stock, especially as last year's comps are significantly easier in the second half of the year.

Goldman Sachs's high-yield team initiated coverage on JC Penney's 7.95% unsecured bonds due 2017 as well as its 5.65% notes due 2020 and its 6.375% notes due 2036 with an Underperform rating on Tuesday and cautions investors against potential liquidity issues at JCP.

The analyst notes that the retailer's term loan could be at risk if the company were to tap into the debt markets. This is based on her thesis of weak fundamentals, inventory rebuilding, and an underperforming home department.

In general, an equity analyst will predict historical and future profitability and potential upside, whereas a credit analyst will be looking at key solvency ratios, z-scores and potential downside.

Put simply, if the credit analyst is worried about the company's solvency, the equity analyst is likely even more (or should be even more) worried as equity is the high beta equivalent of credit.

Recall on Aug. 20 when JCP reported Q2 earnings, MT Newswires was cautious on the company's fundamentals after taking a deeper dive into the quarter.

Ironically, the stock actually gained after the results hit the tape although this likely was because expectations were already so low.

Specifically, JCP's Q2 EBITDA loss was driven by a 12% decline in comps (worse than the street at -8%) coupled with 700 bps of gross margin compression. Inventory levels were also high, up 5% year over a year - a red flag given that revenues were down 12% year over year. Apparently, the retailer attracted fewer new shoppers in 2012 than in the past 10 years.

Per Goldman's report, JCP will likely need to safeguard against a poor holiday season in Q4, and as such, will build a bigger liquidity buffer. The analyst believes that new capital will come in the form of additional debt (rather than equity), which is a negative catalyst for creditors.

It is worth noting that competitors such as Macy's ( M ) and Kohl's ( KSS ) have also been less than sanguine ahead of the Christmas selling season. However, both companies have very different credit profiles and are not burning cash at the same rate. JCP ended Q2 with $1.5 billion in cash (revolver drawn by $850 million), but reported an alarmingly high cash burn of $1.15 billion.

Separately, Goldman's equity analyst continues to hold a Neutral rating on the stock.

JCP 10.78 +0.66 +6.57

M 43.00 +0.20 +0.47

KSS 52.07 +0.51 +0.99



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

Copyright (C) 2014 MTNewswires.com. All rights reserved. Unauthorized reproduction is strictly prohibited.


This article appears in: Investing , Commodities

Referenced Stocks: JCP , KSS , M

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