Faced with the task of reporting dreary overall sales figures, shopping mall retailers' management teams often point enthusiastically to Internet sales, which are invariably rising nicely (off of a tiny base, of course). J.C. Penney has managed to make a foul parody of this diversionary tactic. The fact that its Internet sales fell by almost 40 per cent in the third quarter reported last week is almost (but not quite) appalling enough to distract from the fact that total comparable store sales fell by more than a quarter.
When any company's revenues are falling at these meteoric rates, it is not long until investors' minds turn from the sales and even profits to a simpler and scarier question: When do these guys run out of money? J.C. Penney now has $525-million in cash on its balance sheet. The cash flow statement shows about $700-million in cash burn over the past year (putting aside things such as asset sales). So it looks, on a very simple view, as though J.C. Penney could be facing a cash crisis very soon.
The simple view is wrong. The next quarter is Christmas: working capital goes down, sales get a big boost, cash goes up (or at the very least, goes down less). The company says it has more non-core assets to sell, and it has $1.5-billion available on a credit line backed by its inventory. And if there was ever an environment to be in a cash-strapped company, this is it, thanks to the Federal Reserve. The search for yield has driven demand for low-quality debt to historic highs.
The company could easily endure a terrible holiday. Poor results in the first quarter of next year could change the outlook, however. That will be the one-year anniversary of J.C. Penney's first truly terrible report, when sales fell by almost $800-million from the year before. If sales (and cash flow) cannot stabilize from the low base established in early 2012, the solvency clock will begin to tick in earnest.