Moments ago, the stock everyone but Bill Ackman and Goldman's loan syndication team loves to hate reported results, and they are, as usual abysmal. On the top line, the company announced that total sales declined by 16.4% from Q1 2012's $3.152 billion to just $2.635 billion, a 16.4% decline. The company provided mea culpa is as follows: "The sales decline in the first quarter is partially attributable to construction activities in connection with the transformation of the home departments in 505 stores. The Company noted that results for the quarter also reflect its prior pricing and marketing strategies, which are being changed under new leadership." Well, there's that. There is also that fewer and fewer people know what JCP is (except for the vulture funds who just can't wait to snap up the real estate at the stalking horse auction), let alone shop there.
More importantly, the company provided a liquidity update, which was as follows: "The Company estimates cash and cash equivalents to be approximately $821 million as of May 4, 2013. Total debt is expected to be approximately $3.818 billion as of May 4, 2013, including amounts outstanding on the revolving credit facility of $850 million, long-term debt of $2.868 billion, and capital leases and notes payable of $100 million."
What does this means for the company's all important cash burn rate? Since the reported cash and equivalents as of December 31, 2012 was $930 million, when one adds the full revolver draw of $850 million, one gets $1,780 million. So in order to get a pro forma cash number of $821 million as of May 4, it means the company burned $959 million between January 1 and May 3, 2013. This is roughly in line with what we expected when we presented the pro forma JCP cap table [4] and is in accordance with JCP's historical net working capital (i.e., inventory) rebuild.
The good news: Q1 is the heavy cash burning period for the company, although it is very likely that the cash burn will accelerate in the coming quarters as the operational strategy is once again adjusted this time under newer new management. The not so good news is that the virtually all the unencumbered collateral in the company has been secured by various pieces of debt. We assume total merchadnise inventory will be roughly $3.2 billion as of the end of the quarter as well. So adding the drawn revolver with the recent Goldman Term Loan which will add another $1.75 billion in encumbrance, and recoveries to bond holders are starting to look very, very shaky.
However, with pro pro forma cash of $821 million + $1.75 billion from the new Term Loan, JCP should have some 12-18 months of breathing liquidity, unless of course, the payables of $2.5 billion become a use of cash, as vendors demand COD. In that case, the company may have about 1 year in dry powder before it has to retain not Blackstone's refinancing team as much as its bankruptcy advisors.