We’ve been warning investors about the seriousness of JC Penney’s (JCP) cash flow situation for some time (click here for an in-depth cash-burn breakdown). It looks now that even in-line commentary about the company’s holiday performance is being deciphered as underperformance, as shares are under significant pressure Wednesday.
JC Penney reported today that the company is pleased with its performance for the holiday period, showing continued progress in its turnaround efforts. Customers responded well to the company’s offerings this holiday shopping season, both in store and online.
JC Penney also reaffirmed its outlook for the fourth quarter of 2013, as previously set out in the Company’s third quarter earnings release dated Nov. 20, 2013.
Though comparable sales are very important (as in the analysis of any healthy retailer), in JC Penney’s case (where survival is the more relevant consideration), we’re more focused on the company’s cash flow trends. Recent news about the intensity of promotional activity in retail this holiday season coupled with JC Penney’s comments (above) suggests things may not really be going that well.
We can’t take management’s words at face value. If things were truly going well, there would have been at least one positive number in the press release (or some more color), offering the analyst community ammunition for the bullish case. There wasn’t, and the market knows it. Though the firm hasn’t disclosed any numbers at all, we can only fathom that cash flow was also weak this quarter.
Valuentum’s Take
We’re not at all interested in JC Penney’s shares, and the news today does little to change that. The question is not whether JC Penney can turn its operations around, but whether the firm can do it without wiping equity holders out completely first. Without details, we continue to believe the latter outcome is the most likely one. Our best ideas are included in the Best Ideas portfolio and Dividend Growth portfolio.