JCP BOARD: FIRE ULLMAN

Takeaway: JCP Board: your CEO is failing you, and the investors you represent. His time is over. Replace him – now – and earn our support and respect.

This note was originally published January 16, 2014 at 21:02 in Retail

SERIOUSLY, LET’S THANK HIM AND SEND HIM ON HIS WAY

The fundamentals have not changed nearly as much as JCP’s equity would suggest, but the reality is that the company is giving us very little reason to continue to support the name as the stock slides (note: recent announcements that; a) results are ‘in-line’ (but without any quantification whatsoever), and b) the company will be closing 33 stores and laying off 2,000 employees). The company might be one of the only retailers that is comping positive in this environment at a higher margin y/y, but that’s in stark contrast to its recent behavior. Recent announcements hardly match up with a company that has confidence in its future.

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We’re still of the view that there is $1.50 in earnings power tucked away inside JCP, and for people that want to look out several years, we really don’t think that there’s any fundamental change to this story. That makes the company’s recent actions all the more ridiculous. The research has not changed, though the timing is questionable. We don’t like questionable timing. We’ll stomach it for a great company, or even a good one, but have less of an appetite when it comes to a company like JCP.

 

The reality is that we won’t continue to stick our neck out when Ullman seems to be doing his best to break it. There are too many great businesses that have gotten hit recently that are far more worthy of defending than JCP (such as RH, ZQK, WWW, and FNP). JCP was our only loser in 2013, and we won’t make the same mistake twice.

 

Management is failing – big. The answer here is for Ullman to jump ship (or get pushed off). The Board has to take action. The company needs a permanent leader. Ullman already made good progress to stabilize the company. We’ll give him that. Seriously. Golf clap for Mike. But it’s time for the next phase of JCP, and he’s not the guy to lead. Not by a long shot.  We’d like to think that accepting the role of Chair of the Federal Reserve of Dallas, and then being elected to the Board of the National Retail Federation is his way of moving off to the next stage in his career. The reality is that being CEO of JCP is easily two-full time jobs, and one of the most challenging roles in Corporate America. JCP’s board had to approve these outside assignments, and we can’t imagine that they’d do so if they thought he was going to be a long-timer.

 

That thought process certainly lends itself to the prospect of a CEO change over the near-term, but we have no edge on that timing. If you want to speculate on that one, it might be a good trade if it proves to be correct. But it’s not a trade we’re going to make.

 

Punchline: The Board needs to fire Ullman and hire a powerful and appropriate leader to unlock the value we know exists at JCP. When that happens, and we gain confidence that the new CEO sees the same earnings power we do, then we’ll support this name until the cows come home, because all of our research tells us that the value is there.  That’s true even if it means getting involved at $9 or $10, presuming we’ll see a pop on the CEO announcement.  The reality is that when someone is running the company that has a definitive long-term plan, and the earnings power we’re modeling becomes a reality (or at least earns a spot in the debate), this can be a big stock even a few bucks higher.