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Takeaway: Contrary to what others are recommending, we think that firing RJ is the fastest way to realizing the liquidity crunch bear case.

Conclusion: Contrary to what others are recommending today, we think that firing Ron Johnson is just about the stupidest thing that the JCP Board could do right now. If they did fire him, we think that it would be the quickest path to bankruptcy for JCP. Sentiment seems to us that the stock would go up on that news. But if we saw him ousted we’d likely short this name with impunity -- even with the sell-side capitulating at a price of $14/15. We think losing Johnson would pose significant vendor/brand risk, and would back JCP into a corner to liquidate its real estate at a discount.

A new CEO would be faced with a binary decision tree. Either A) Return to being the lowest-quality department store in America, or B) carry out Johnson’s shop-in-shop plan better than RJ could on his own. Johnson clearly blew himself up in 2012, but we don’t put blind faith in the ability for anyone to come in and implement this plan any better. Keep in mind that 75% of the problems JCP has had have little to do with changing up the shop format and upgrading the merchandise assortment – it was largely due to RJ getting the pricing/marketing/value proposition wrong on the existing merchandise. Letting RJ run with the current plan might carry more risk as 2013 unfolds – but doing it without him is riskier, with potentially more significant financial pain.

 
1) First off, once a cucumber becomes a pickle, you can’t reverse the process. It already has architected its square footage to new shops, chosen new partner brands, and gotten rid of hundreds of vendors to make room for what is coming down the pike. That cannot be undone, which leads us to the conclusion that a new leader would need to move forward with the current plan – or something pretty darn close to it. Unfortunately, JCP does not have the liquidity for a new CEO to shake the Etch-a-Sketch clean, start over, and create a new plan. The lack of capital deprives JCP of the oxygen needed to go down a new path.
 
2) Ron Johnson has spent easily a third of his time ensuring that the right brands/vendors are chosen, and then collectively working with the brands and his merchants to make sure that the right product is in the right place inside the store. Whether you like RJ or not, the reality is that the vendors still like him – a lot. They buy into the long term vision (even if no one on Wall Street does). We’re relatively certain that at least a few large vendors would balk at rolling out product inside JCP if leadership and strategy changed dramatically.  
 
3) If that were the case, JCP would be left half-pregnant.  It wouldn’t be able to fill the shelves quickly with legacy product (i.e. become the old, poor quality JC Penney), and the product that should ultimately drive traffic under the new plan is at risk of never becoming a reality. Then we can build to an algorithm where comps are down another 20-30%, and not only is JCP forced to use its full revolver, but to liquidate its real estate, which we estimate to be worth about $1.8bn-$2.1bn (see our note from last night “JCP: Duration Matters More Than Ever’) to fund operating losses.
 
4) Allen Questrom, the Godfather of retail (we mean that in a complimentary way), was on CNBC today talking about why RJ should be fired immediately. He said that the Board needs to admit its mistake and move on. At face value this carries a lot of weight given that Questrom is the only person to successfully turn around JC Penney. But let’s be real. When Johnson went down the path of ‘reinventing’ JCP, Questrom did not make the cut of people he leaned on to consult about a solution. Questrom likely viewed that as a snub, and also probably has little patience for anyone that is seemingly destroying something that he worked so hard to fix. Not really a shocker that Questrom is on the short list of people recommending that he’s ousted due to 2012’s failures. Also keep in mind that he’s on the short list of people that would be considered for the top job (though we have no reason to think that he’d want it).