Here's our take on JCP's volatility over the past two days -- specifically its' announcement that it received an inquiry from the SEC about its liquidity and recent equity offering. First off, let's just state up front that we take any SEC inquiry very seriously. We'd never in a million years chalk it up as a non-event. But there are some major factors to consider…
- We're Not Dismissing It, But This is Routine: Regulators ask for information all the time. In fact, we'd challenge anyone to find any three companies (you can probably find one) in the S&P that have never unexpectedly been subject to a request for information by either a federal or state regulator.
- Timing Matters: Consider the timing on this one…though it is only being disclosed now, the inquiry happened on October 7th -- that's almost two months ago. That was within two weeks of JCP announcing its equity deal, which subsequently took the stock down 26% by the inquiry date and sparked several shareholder lawsuits. To top it off, it was at a time when the company had yet to show any operating improvement whatsoever and the 'going to zero' call still carried some weight. With all of that happening at the same time -- it seems to us that requesting information about financing and liquidity seems like a prudent fiduciary move by any regulator.
- Fundamentally, Nothing's Changed: What's changed with this story fundamentally? Nothing. Business continues to get better on the margin as JCP regains share from KSS and the other retailers who benefitted from it writing a $4.3bn check to competitors.
- Stock Move Led The News: So what about the stock move over the past two days? Do you think that just MAYBE someone somehow had scoop that a) One of its largest holders sold out of its 5.2% position in the equity (still holds the debt), and/or that b) the company was going to disclose the SEC inquiry with its 10Q -- after all JCP has been squatting on the information for the better part of 60 days. So while that trading was taking place and the stock was tanking, it naturally gave the hoards of bears on the sell side the stock equivalent of beer-muscles to get louder on the short side while still hanging on to the same old stale 'going away' call.
- We're Tweaking Our Tone On Ullman. One quick point on Mike Ullman, interim CEO of JCP. The WSJ is out this evening with a comment that that while the company is still searching for a new CEO, it is inclined to keep Ullman at the helm til the turnaround is done. Now…let's be clear about something. We're not members of the Mike Ullman fan club. We'd been in the camp that the company needed to replace him by April. We still want him out. But our patience has grown in recent weeks. The reality is that he's absolutely stabilized the company, and he's taking the appropriate steps to regain customer confidence, and ultimately re-grow the top and bottom line. We never thought we'd say this, but if the guy is still there in a year, we won't be upset -- so long as he realizes that the second that turnaround is within spitting distance, we need fresh blood in the C-Suite to take this company to the next level.
- We're Not Banking On JCP Being A Good Retailer: Importantly, that 'next level' is no where in our investment thesis. We're simply in the camp that JCP is going to go from being a horrendous retailer, to being a bad retailer. We realize that this hardly sounds like an appetizing investment thesis, but mathematically it all flushes out to about $1.50 in earnings power, or about a $20 stock. If a new CEO could add any value above and beyond this turnaround, that's gravy as it relates to the stock and upside from $20. We'll take it one step at a time.
- Consumer Survey, Round 2: On Monday at 1pm we're hosting the second installment of our JCP consumer survey. The first iteration was critical in helping us gain confidence in JCP heading into the quarter, and in being short KSS. We look forward to sharing our update with you. Please send me a reply email if you are interested, or contact firstname.lastname@example.org.
- Bottom line: Despite the confluence of bad news that hit over the past 48 hours, we're still bullish on the stock.