It's time to take a look at an updated view of JC Penney's cash flow through the lens of the Cash Flow Focus Report.
I have to admit I'm fascinated by the JC Penney turnaround story. As a longtime CFO (a good portion of which was in the multi-unit retail world), I enjoy looking in on JC Penney as they develop and execute their turnaround strategy.
Here's the first post on JC Penney's cash flow as they were going into the all-important holiday selling season.
The Cash Flow Focus Report
As regular readers of my blog know, I consider cash flow to be the "bottom line" of financial management/understanding. And it all starts with answering this common sense question: "What's going on with the cash?"
The Cash Flow Focus Report is the tool for answering that question. (It should only take 10 minutes to complete the report.) Here is the 3-step process:
- Focus on the three largest drivers of cash
- Write a one line explanation of each cash driver
- Label each change as good or bad
The Quarter Ended February 1, 2014
The quarter ended February 1 included the all-important holiday selling season. Many retailers live or die based on sales in November and December.
For the quarter, the company made $35 million and cash went up by $288 million. So now let's answer the all-important cash flow question: "What happened to the cash."
I pulled up the JC Penney financial statements and completed the Cash Flow Focus Report. Here is what it looks like (amounts are in millions).
The Three Largest Drivers of Cash Flow
The essence of simplifying cash flow for any company (small or large) is to focus on understanding the three largest drivers of cash for the period. It is an amazingly effective way to understand the cash flow of a company (for any period).
Let's look at each of the three big drivers of JC Penney's cash flow for the quarter.
- Reduction in inventory – inventory came down by $812 million. I labeled the change as good since you would expect inventory levels to come down after the busy holiday selling season.
- Reduction in accounts payable – accounts payable was paid down to the tune of $461 million. Coming out of the busy selling season and reducing inventory (and therefore purchasing) levels brings with it a reduction in payables. I labeled the change as good since it is logical and expected.
- Pension plan tax benefit – the company describes this non-cash item as "income tax benefit from continuing operations resulting from actuarial gains in other comprehensive income". When you look at the income statement they show a pre-tax loss of $235 million. Then a tax benefit of $270 million which creates the net income of $35 million. It is basically non-cash income that is being deducted in the Cash Flow Focus Report since it had no impact on cash during the quarter. I labeled the change as good since I am assuming the accounting is accurate.
Now the Next Question: What's About to Happen to the Cash?
Now we have answered the first key question: "What happened to the cash"? The next question is "What's about to happen to the cash"? Those are the two questions you need to be able to answer in your business at the end of every month.
Of course the question about what's about to happen to the cash is much easier to answer when you are looking at the cash flow results for your own company rather than a company you may not be as intimately familiar with. But we can make a few estimates/assumptions based on what we see in the Cash Flow Focus Report for JC Penney.
I don't expect inventory to move in a big way since the next quarter is not a big one.
I also don't expect much in the way of capital expenditures because the company has said they will not be spending as much there as they have in the past.
The big question is whether they can increase sales and increase gross margins in the coming quarter. JC Penney has said they expect same store sales to increase about 3 to 5%. Gross margin for the last quarter was 28.4%. The quarter before that it was 29.5%.
Looks like they have some work to do on gross margin.
JC Penney's Full Year Cash Flow
To give you an even bigger picture view of JC Penney's cash flow, let's take a quick look at the three largest drivers of cash for the full year ended February 1, 2014 (amounts are in millions).
In short, they raised cash by issuing short and long-term debt. A total of about $2.8 billion. And they lost $1.4 billion during the year. Ouch!
They also sold some stock to raise about $786 million.
The good news is they have some cash on hand to continue the turnaround. It will be fascinating to see how it all turns out.
You can learn more about my online course Understanding Your Cash Flow – In Less Than 10 Minutes by clicking here. The course is very short and focused on helping you better understand your cash flow and put the Cash Flow Focus Report to work in your business. It's all about simplifying cash flow.
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