Philip Campbell's Blog

An Interesting Look at JC Penney’s Cash Flow in the Cash Flow Focus Report

As a business guy, I can't help but be interested in the JC Penney turnaround story. I spent more than 20 years of my career as a CFO in the multi-unit retail world. So watching how JC Penney tries to deal with falling same store sales results and tries to bring customers back to their stores is fascinating.

So I decided to use my simplified approach to understanding cash flow to review JC Penney's financial results for their quarter ended November 2, 2013. The heart of this approach is to complete the Cash Flow Focus Report. That means I will:

• Keep it simple (it should take 10 minutes or less)
• 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 Cash Flow Focus Report

For the quarter, the company lost ($489) million and cash went down by ($308) million. So the all-important cash flow question is: "What happened to the cash."

I pulled up the JC Penney Statement of Cash Flows and completed the Cash Flow Focus Report. (You can learn more about the power of the Cash Flow Focus Report here.) Here is what it looks like for JC Penney.

(Click here to see a larger view of the Cash Flow Focus Report)

(Click here to see a larger view of the Cash Flow Focus Report)

The Cash Flow Focus Report is a high level view of a company's cash flow. It starts with the beginning cash for the period, shows each of the three largest drivers of cash (whether an increase or decrease), nets all other changes on one line, shows the net cash flow for the period, and ends with the ending cash balance. It is designed to basically fit on a note card. That's part of the secret to keeping it simple.

The Three Largest Drivers of Cash Flow

I have found that 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 any company (for any period).

Let's look at each of the three big drivers of JC Penney's cash flow for the quarter.

• Sale of common stock – the company sold common stock that netted about $786 million. The primary purpose was to make sure they had enough cash to get through the turnaround. Interesting note is they had bought back about the same amount of stock a couple years ago at about three times the price. Whoops! The sale was a big dilution for existing shareholders. I labeled the sale as good because, on balance, it gives them a fighting chance at completing the turnaround.
• Increase in inventory – you would expect an increase in inventory going into the holiday season. The increase is about 19% from the prior quarter. The interesting thing is inventory is up about $1.4 billion for the nine-months. That seems like a big increase in the prior two quarters. I labeled the increase in inventory (and the related use of cash) as good on the assumption that inventory will come back down at the end of the coming quarter.
• Net loss – The company lost ($489) million on revenues of $2.3 billion. I labeled the loss as bad because it is such a big percentage of revenues (even though it is in the middle of a turnaround). And same store sales were down about 5% in the quarter. And gross profit margin was down in the quarter to 29.5% from 32.5% in the same quarter of last year. They clearly have a tough road ahead to become profitable.

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.

1. One thing we know is the use of cash to build inventory should turn around and be a big driver of cash flow for the coming quarter. If not, something big went wrong for them during the holiday selling season.
2. They won't be selling more stock so that big driver won't repeat inside anytime soon.
3. Hopefully, their loss won't be so big. That would be a nice improvement in cash flow.

We'll see what happens when they report earnings next quarter. I'll update the Cash Flow Focus Report and share it with you.

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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How Much Have You Spent on Capital Expenditures This Year?

Capital expenditures are an important part of your plans to grow your company. It can also be a huge and sneaky drain on cash that has no ROI and little accountability. I've seen it happen more times than I care to admit in my career as a CFO.

Do you know how much cash you have spent so far this year on capital expenditures?

Can you put your hands on that number in less than five minutes?

If you can't, here are two very quick reads that will help you get control of your capital expenditures.

Smart cash flow management includes a written Capital Expenditures Plan

How to prevent cash from leaking out of your company

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There is an Opportunity Hiding in Your Financial Statements from Last Month

In the spirit of my post last week about the focusing question, I want to encourage you to find one improvement opportunity that might be hiding in your financial statements from last month.

Take about five minutes to look at your income statement and balance sheet form last month. Consider a few of the metrics or drivers of financial performance that are hidden below the surface of the financials.

Is there one key driver that you suspect is a problem? Is there one you know is dragging your financial results down?

Just pick one area to drill down on and focus on improving over the next 30 days.

Your first step may be to get the additional information you need in order to see the trend in that driver and quantify just how much it is off. Or sit with your CFO and talk through that specific area of the financial statements to make sure you fully understand what's happening in that part of the business.

Here are a few areas to look at:

• Gross profit as a percent of sales. Is it headed in the right direction? Are there certain products or services that you suspect have a gross margin that is not where it should be?
• Employee expense. Is your employee cost gong up faster than gross profit? Have you fully considered what the new healthcare law may mean for your insurance costs over the next 12 months?
• Accounts receivable. How many days of sales are sitting in accounts receivable? Is that number going up? Is your team doing a good job of collecting your receivables?
• Inventory. How many days of sales (or cost of sales) are sitting in inventory? Is the buying process under control?

Take a quick look and pick ONE area to focus on and improve over the next 30 days.

Focus is a powerful tool. And ONE is a powerful number!

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The ONE Thing

Few business people would argue that focused, intentional effort on an important goal is a bad idea. But most people would agree that a laser-like focus is not always easy to accomplish (or sustain).

Gary Keller and Jay Papasan wrote a great book titled The ONE Thing: The Surprisingly Simple Truth Behind Extraordinary Results.

One of the concepts in the book that intrigued me is what the authors refer to as the Focusing Question:

What's the ONE Thing I can do such that by doing it everything else will be easier or unnecessary?

They describe the Focusing question as "both a map for the big picture and a compass for your smallest next move".

Take a few minutes to ask yourself the Focusing Question. It's power may surprise you.

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