In a release out this morning, JC Penney (
) 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
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
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
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 (
) and Kohl's (
) 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
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