Conclusion: We’re buyers of JCP on today’s sell-off. Let’s be clear about what kind of call this is, because it’s definitely not for the faint of heart. We still know nothing about the long-term strategy or upcoming management transition, and are still living with the balance sheet baggage from the past two years. This is a company with no square footage growth, where the average consumer could care less if it exists or not. (Sounds great, huh?). But everything has a price. And at $10, way too much credence is being given to the ‘terminal’ call. We can say a lot of bad things about JCP, but we definitely don’t think it is terminal and our recent work suggests that much of the business lost is definitely recoverable. As it relates to liquidity, we think that the only reason why the company would act now is to ensure that it has the best pool of CEO candidates possible (questions around liquidity would otherwise weed out the best candidates).
1) Some Consumer Insights From Our Recent Survey Work
- Our recent survey work of JCP’s customers suggests that they left (or are spending less) for reasons that are fixable. Such as a) poor pricing, and b) lack of sales/promotions…
- Consumers noted, on the whole, that they will return to JCP if these items are fixed.
- Another big negative… elimination of exclusive brands like Arizona, St. John’s Bay, etc…
- Consumers went to KSS and M more than any other retailers. We think KSS (which got about 19% of JCP’s business lost) will be particularly easy to target for customer re-acquisition. We’re talking about $800mm.
2) Gross Margin: Don’t underestimate the GM opportunity here. Johnson took away $2.5bn in revenue at 48% GM%, and substituted it it with under $1bn of revenue at 33% GM%. That’s a 500bp opportunity right there.
JCP Historical Gross Margin Change
3) Liquidity: Our analysis (below) suggests that JCP’s liquidity will definitely be tight – starting in about 6 quarters – but will not crimp its ability to self-finance its recovery. The company has in excess of $1bn of sources to monetize before tapping capital markets (which is not included in the analysis below). Here’s a catch: They’re searching for a CEO. Having a cash-filled balance sheet broadens the pool of candidates. As such, they might tap markets simply to get the right talent on Board.
4) Re today’s price movement: Five things combined to create the massive sell-off you see today.
- A research firm came out today saying JCP 3Q sales are weak and that the company won’t comp in 4Q
- JCP in court today for MSO/M case – something that absolutely no longer matters.
- CEO Ullman is having a meeting with a broker today
- GS Hi Yield analyst out last night saying that equity is worthless
- Zerohedge glomming on to the fact that GS profited from the JCP secured term loan that it issued (and currently holds) in April, and now it is trying to make money on the other end while it pushes for JCP to file.