JCP: 'Less Horrendous' = Positive on the Margin

05/07/13 09:58PM EDT

The way we see it, this JCP sales preannouncement is positive on the margin for the stock, although the perma-bears will attempt to argue otherwise.

By no means is a -16.6% sales comp good. In fact, it's pathetic given that JCP went up against an -18.8% in the same quarter last year. It suggests that the two-year comp eroded sequentially from -18.7% in 4Q to -24.7% in 1Q.

But the reality is that…

a) The company beat our expectation for a -20% comp decline. This is the first time in six quarters the company did not miss our estimate.  

b) JCP noted that over 500 stores were under construction -- something that is 100% valid. We all knew this headed into the quarter, but it was impossible to gage the precise impact on the comp. Could it have been -10%? Yes. -25%? Yes.  No one knew then, and no one knows now. It's pretty tough to drive comp when there are more workers swinging hammers than ringing cash registers.

c) As expected, Ullman threw Johnson under the bus -- again (the first time being with last week's  'mea culpa' ad campaign on YouTube). Simply put "this sales weakness is because of the old management's sales strategy -- and we're working on implementing a new sales strategy". People will give Ullman a pass.   The irony is that even if Johnson were still at JCP, sales would start to get sequentially better in the wake of the Home Department redesign. Nonetheless, Ullman will take the credit as things improve. We don't fault him for that as much as we do failed boardroom politics leading to Johnson getting sacked (we've been vocal about our view that Johnson shouldn’t have been fired -- at least not yet).

It's important  to note that the release said nothing about inventories or earnings -- and as we all know looking solely at sales, inventories or earnings without considering the other factors is very dangerous in retail. But given that this number was disclosed in connection with its term loan financing transaction, we'll assume that if inventories were overly bloated or gross margins were  decimated (ie on par with what we saw in 4Q), the company would have given at least some indication. Goldman would probably have made sure of that.

When all is said and done, this result is in line with our view that the wind is at JCP's back over the near-term.  That said, we can't comfortably get on board with the stock because we have absolutely no clue what the long-term strategy is here (or have faith that the correct strategy will be implemented). Under Johnson, we knew the plan -- even if it was a stretch -- but with Ullman, the best we can surmise is that it will return to being one of the most promotional department stores in the country -- but with a slightly better product offering.

JCP – bearish TAIL (21.48 resistance); bearish TREND (17.95 resistance)

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