JCP: War Pending in the Mall

Takeaway: Owning this name means waiting for the new stores to outweigh the old stores in quantity. Let’s hope the balance sheet lets it get there.

What Everyone Will Say: Results severely missed expectations. Comps down 26%, Internet sales down 37%, and margins off by -1237bps. Adjusted earnings showed a loss of $0.93. Management seems to have a very good sense as to where things went wrong, but not necessarily a good strategy to fix things anytime soon. The video of the new store concept looked great, and shows a transformed JC Penney into jcp, but it will take time to rollout en masse until newco outweighs the size of JC Penney.


What We Say: We did not like the stock the day Johnson started, and we don’t like it today. In fairness, this weakness was worse than even our model by a factor of 2x. We expected better, but are not surprised. Here’s are our low/highlights…

  1. We liked the fact that Johnson was more humble compared to a flat-out arrogant 2Q conference call (when he said he is missing Analysts targets, not His, just 2 quarters after spoonfeeding the Street).
  2. But unfortunately, it took the form of RJ going through his ‘Learnings’, which were really nothing more than realizations of factors that he should have known about this business before he took the job.
  3. The biggest Learning was ‘pricing’ in that when he offered lower prices, consumers responded in both traffic and conversion. When they held firm with a higher price, both metrics suffered. Sounds basic enough, huh?  unfortunately, it took a year to understand.
  4. If we were locked in a dark room and could see only one statistic about a company’s performance (aside from the stock price) it would be e-commerce sales. The simple fact that .com was down by 37% -- a sequential erosion – is just sad. One part of e-commerce is being operationally sound to handle consumer demand through a different, and more profitable, channel. But another is actually having consumers that care about the content in the first place. JCP has done a great job in driving consumers away, and it is going to take more than free haircuts to get people back shopping. It is going to take repeated positive experiences – which will take years to play out over a base of 1,100 stores.
  5. Johnson noted again how ‘this is a Journey’. We don’t want a Journey. We want a business that will take share profitably, and return capital to shareholders at a greater rate than other retailers.

JCP: War Pending in the Mall - JCP remodels

6.  Cash flow from operations for the year is -$655mm, JCP’s net debt to equity is sitting at historical highs of 0.67x, and we’re staring down the face of a FASB-mandated accounting change to capitalize operating leases that could inflate JCP’s balance sheet further to a point where borrowing capital to fund its transformation could become very difficult. Ultimately, JCP is likely to charge ahead, but would have to sell assets in order to do so. It’s already made the easy sales. Future ones are going to be less favorable economically.

7.  On that note, RJ stepped into dangerous waters when he started to call JCP a specialty store yet compare it to mall owners Simon, GGP, Macerich and Taubman. That was odd, to say the least. He followed up later to a question about specialty store productivity (which is $300-$400/square foot). He admitted then that jcp will be a specialty store, but with department store productivity.

The punchline here is that the call has not changed from last summer. Johnson is operating on a 7 (now 6) year duration. That’s when he gets paid. Wall Street largely cannot wait that long. Until then (and possibly after) we still are not sure that JCP will ever see an earnings number over $2.00. Trying to gage earnings this year is a Hail Mary. And either way you come up with a negative number. P/E valuation is meaningless. But with it its current debt burden and lack of cash, we’re looking at an EBITDA multiple near 10x. That’s just flat-out bad. At some point, this stock will look interesting as the shops gain traction, but that will be a long time from now, and until then we can point to nothing that should make it go up from $20. We think that JCP will create a massive headache for companies such as Macy’s, Gap, and Kohl’s as it takes up its product mix. The rationale is that regardless of JCP’s success, 100% of the product is being sold through. It just depends on the price, and therefore gross margin.