Conclusion: There are more cross-currents swirling around JCP right now than at any time since the story thrust itself into the mainstream back in the summer of 2011. But we think it’s key to draw a dividing line between today’s sheer lack of debate around any potential earnings power – ever – and reigniting a debate around what JCP could become and ultimately earn under a real leader. We’re not professing the validity of the bull case, but are simply pointing out that sub-$13, a bull case does not even appear to exist.
Let’s make one thing absolutely clear. The way that Ackman is going about communicating proposed changes to the management team at JCP is self-serving and irresponsible – at least the way that I (McGough) am looking at it. But the reality is that the end result – that CEO Ullman needs to be replaced with someone that can actually drive this business forward with a transformational vision and an executable plan – is the right one.
We’re on record back in April in saying that the JCP Board was either six months too late in firing Johnson, or six months too early. It should have acted based on his pricing miscues back in the fall and into holiday (probably not the right move), or based on the outcome of his new shop-in-shop rollout (which wouldn’t have been known until 2H of this year).
So what did we get? We got Ullman. The former CEO – the one that is really really good at discounting below-average product to average Americans. Howard Shultz of SBUX can get on CNBC all he wants and rave about how great a leader Ullman is (he did this last week), but Ullman’s track record for creating value is horrendous. Yes, he made a good move towards stabilizing JCP’s balance sheet, and sales are less horrible under Ullman than they were under Johnson.
But the reality is that Ullman is beginning to behave like he is going to be at the company for a while, which is inconsistent with the purpose for bringing him on as abruptly as the Board did back in April. And that’s just not good. Since he was named CEO the stock is down 18.9% while the S&P is up 7.8% -- and that’s only four months.
There’s one major thing that people need with this story – and that’s someone who can stand up and lead all constituents (customers, employees, vendors, creditors, and investors) to believe what they (at least partially) believed 12-18 months ago – that this is a company that can return to an $18bn sales base at a minimum, and eye something above $2.50 in EPS power.
We’re not saying that it can happen at JCP. But today, no one is even making the argument anymore. The debate isn’t even alive! THAT’s what’s represented in a $12.86 stock price.
Our point here is that one press release can be a big first step toward changing all that. And that’s an announcement that a person with a vision for what JCP ‘could be’ is anointed with the confidence and respect of the Board to step in and get the job done.
Ironically, we think that the right answer is something pretty darn close to what Johnson was trying to accomplish. Is the right number of stores 400 remodels instead of 800? Perhaps. Is the cadence of the roll-outs slower than Johnson planned? Yes. Are certain high-end brands that JCP had planned not appropriate for the JCP customer? Yup. But directionally, the idea was probably the right one.
The bottom line here is that based on the current management team and lack of long-term vision to create value in a rapidly changing retail climate, we have zero confidence that this is a story that has any staying power, and will not otherwise go the way of Sears.
Our gut says that we’ll get a significantly better management team in place (note Perry Capital going as far to note that it wants FL's Ken Hicks in the CEO role when it filed its 7.26% position on Friday). The pressure on a management change seems to be like a balloon under water that is about to burst.
So as it relates to the stock, if we have to look at it based on what we have today, JCP is as unexciting (and risky) as it gets. But when we think of a new management team coming in and at least firing up a (currently nonexistent) debate on earnings power, the stock looks interesting to us under $13.
JCP: Hedgeye Sentiment Monitor Shows That Investor Sentiment Is About As Bad As It Can Get