JCPenney Draws $875 Million, Faces 'Alarmingly High' Cash Burn Rate, Says Analyst

Shortly after announcing that it hired advisors to raise $1 billion to bolster its shrinking cash reserves, JC Penney announced that it drew $875 million from its $1.85 billion credit line.

Brian Sozzi, CEO and Chief Equities Strategist at Belus Capital, says that the size of the withdrawal is alarming.

"The number signals that right this very second, the cash burn rate is alarmingly high after a disappointing first quarter and continued store level modernization efforts," Sozzi says.

Using the credit line shows that they couldn't wait to raise new capital through investors, which Sozzi predicted would be necessary in February.

On the other hand it may be alarming that Penney couldn't withdraw more money. Writes Zerohedge:

More worrisome is the fact that the firm managed to extract only $850 million on $2.3 billion in Inventory: while not completely worthless as we first suspected, it appears JPM is only willing to give JCP credit for about a third of its inventory at liquidation value. Remember that the revolver it is the cheapest financing JCP has in place which raises the question - why not draw more? Ask JPM.

The company's credit line is an "asset based loan" secured by inventory and accounts receivable. It increased the maximum amount of the loan earlier this year, but hadn't drawn upon it until now. It comes from a number of banks including units of JP Morgan and Bank of America.

The company can draw on the line of credit at any time, and only pays interest on the amount that it has withdrawn.

CEO Ron Johnson stepped down last week after losing support for a radical turnaround strategy included building boutique-style shop-in-shops in stores and getting rid of promotions.

The company plans to use the money to fund its operations, capital spending, and to buy inventory as it completes renovations on its stores.

The press release seems to confirm that new CEO Mike Ullman isn't scrapping Ron Johnson's changes to the company's stores.

From the release:

As we near completion of the home department transformation in over 500 stores, we have been undertaking and will continue to experience a significant inventory build and increase in capital expenditures.

Even partial execution of Johnson's strategy is going to require significant cash, so this is just the first step in a longer saga.

JCPenney shares are down nearly 0.7% after trading up 3.5% in pre-market trading before the news.