Why J.C.Penney's (JCP) Cash Position Looks Shaky: Sterne Agee

Tickers in this article: JCP

NEW YORK (TheStreet) -- Sterne Agee has placed J.C.Penney's  liquidity position under the microscope and found the embattled retailer's cash situation worrisome, so much so it has suspended its $3 price target.

The move comes nearly a week after institutional investors Hotchkis & Wiley, Dodge & Cox and Hayman Capital withdrew their positions in the retailer. Another, Evercore Trust, lowered its stake to 4.12% from 5.33%.

Sterne Agee's Charles Grom, Renato Basanta and John Parke said while they expect a sales turnaround, the company will likely run into cash concerns within a few quarters at the current pace of recovery.

"Our base case currently incorporates a 2% comp in FY14 and a potentially generous gross profit margin recovery to 35.5%, but this still results in ~$800 million in cash burn, including ~$1.26 billion burn through 3Q14's peak seasonal inventory build," the analysts wrote in the report.

"As a result, cash levels fall to very low sub $250 million levels in 3Q14, which we believe may be too tight for vendors' comfort."

Sterne Agee sees additional cash burn of around $1.2 billion through to the October-ending third quarter of fiscal 2015, despite around 3% comparable store growth. Such a rate of spending will likely require another capital raise, something the company should consider sooner than later.

"We estimate the company may need a $500-$750 million liquidity infusion given the current pace of sales/margin recovery," said the analysts.

The Plano, Texas-based retailer has continued to see comps down around 7% through 2013, albeit at a less drastic decline than 2012's 25.3% drop. The company's most recent third quarter marked the seventh consecutive period of negative EBITDA. In the period ended October last year, the company posted an EBITDA loss of $218 million and a per-share earnings loss of $1.85.

The analysts anticipate full-year cash burn of $2.7 billion, including a net loss of $1.8 billion and capital expenses of $990 million.

In order to maintain liquidity, the analysts note there are options, though limited. These include raising $500 million in debt through a term loan, selling peripheral assets such as its 240 acres of real estate, monetizing below-market leases, or issuing additional equity (a last resort measure).

The investment firm notes the route to positive free cash flow will occur once a "significant change in comp trajectory" takes hold.

"Sales per square foot likely need to be 25% + above trough 2013 levels with gross profit margins in the 36-37% range and SG&A per square foot growth of only ~3%-6% vs. 2013. Importantly, we still view this as achievable, but believe the pace of recovery needs to accelerate soon, particularly given the weather/macro headwinds we are seeing throughout retail," the analysts wrote.

Until the firm receives greater detail on J.C.Penney's recovery, Sterne Agee has suspended its $3 price target, but retains a "neutral" rating. The analysts anticipate a fourth-quarter and full-year net loss of 36 cents and $3.72 a share, respectively.

J.C.Penney is due to report its fourth quarter and fiscal 2014 after the bell on Wednesday, Feb. 26.

Analysts surveyed by Thomson Reuters anticipate a net loss of 82 cents a share on $3.86 billion in sales. For the full year, consensus is for a net loss of $6.11 a share on $11.93 billion in sales.