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Two days into Johnson’s tenure on JCP’s Board, the company initiated JCP an early retirement program, which is a nice move for Johnson at face value. He is effectively throwing his feelers out to see which senior members of the organization are interested in taking the offer helping shed overhead. Here are a few thoughts on the news:

  1. There are few details regarding the scope and size of the voluntary-retirement program. We have run a few numbers on what this could mean, but in doing so, assume this plan is intended only for those at corporate.
  2. With roughly 150,000 employees and using the general rule of thumb for a big box retailer that corporate accounts for ~2% of employees, we are talking 3,000-4,000 eligible heads. Of that number, there are likely 20% that have 20-years under their belt, which further narrows the pool of eligible employees down to 600-800 potential takers, or 0.5% of JCP’s entire workforce.
  3. On a dollar basis, this equates to roughly $140mm or 10% of JCP’s total salary expense, and ~2% of SG&A according to our math (see below).
  4. This implies an opportunity to shave 80bps off SG&A if every single employee took the offer and the company doesn’t back-fill vacated posts with new talent, which is highly unlikely. More realistically, we’re talking maybe 10%-20% of those eligible “cash out” early, which equates to 7-15bps margin opportunity.
  5. In fact, given that the company will have to payout severance expense associated with early retirements that most likely include at least 3-years of salary, we’re looking at ~50bps hit to margin before the company starts to realize its 15bps benefit.

The bottom-line here is that we agree that this is step in the right direction for the company over the longer-term as it looks to reduce fixed overhead costs.  It’s also a great way to get rid of ‘C’ and ‘D’ players.

But in the grand scheme of what needs to be fixed at this company, it is only a drop in the bucket. We still think that this will prove to be an extremely ugly CEO transition, and that earnings will go much much lower before they go higher. Johnson’s duration of 7-years is much greater than the average investor.

See our recently released JCP Black Book for more detail on this and other factors that have us squarely in the bear camp on JC Penney. If you are interested in receiving a copy, please contact .

JCP: Retirement Plan a Drop in the Bucket - JCP Emply 3 8 11

 

JCP: Retirement Plan a Drop in the Bucket - JCP Emply 2  8 11

 

JCP: Retirement Plan a Drop in the Bucket - JCP Emply 8 11

 

Casey Flavin

Director