JCP: Stuck in the Penalty Box

Takeaway: JCP is definitely in the penalty box, but after weighing the pros and cons (of which there are many) we're still keeping it on our roster.

If there is any company on the planet that can consistently find a way to disappoint more than JCP, we’d love to see it.  Everyone is saying the same thing this morning, so we’ll try not to be repetitive. On one hand, the fact that the company came out and reaffirmed guidance is positive. It’ll be the only department store this quarter to have positive comps and margins. But on the flip side, do you think that they could have given us a number or two? It’s not much to ask. After all, almost every sales update that they have ever issued included numbers. We don’t think sales updates are critical for a retailer, but it’s kind of like a dividend – once you start, you can’t stop – and you certainly can’t give less information over time (unless you want to destroy equity value).  This thing is down, obviously, and it deserves to be. JCP holders should be irate. We are.


There are 2 key questions we need to ask ourselves.  1) What are they hiding, 2) does this change the thesis we outlined in our Long Summary last night (The Search for Doubles and Triples), and 3) What does this mean for expectations and sentiment?


1)     Hiding?  Our sense is that they’re not hiding much of anything. They’re hoping. Sales growth absolutely tapered since the 10% comp issued around Black Friday. We all know that. If we assume that management’s “positive comps” translates into 3% for the quarter (below consensus of 6%) then the 2-year comp is an atrocious below -30% level as opposed to simply being ‘really bad’ in the -20s (which people expected.  We think that the vagueness is driven by one factor alone – the possibility of making up for a weak December in the month of January. Hope. That means that JCP kicks up the promotional engine. If we were another department store, we wouldn’t want to compete with a promotional JCP – given that its’ Gross Margin is already sitting so far below its peers. But our obvious concern is that JCP will pick comp in Jan over margin. We understand it needs to rebuild customer loyalty (traffic/comp), but at some point it’s going to have to start making money on the revenue. Last we checked, cash is pretty important.

2)     Does this change our thesis? Well… it certainly doesn’t change the fact that this one is last in our Long queue. One thing that could change our thesis is if the company is taking it on the chin with Gross Margin, and still is not seeing any sales acceleration. Gross Margin is the last offensive weapon JCP has. If it shoots and consistently misses the target, then it definitely impacts our call. But for now, we think that even with a 3% comp and 30% GM, liquidity is definitely not an issue this quarter. Importantly, even if we are to cut our comp assumptions in half next year, liquidity is still not a problem. Finally, if the recovery stalls here, there’s one thing you can bank on – Ullman being shown the door. Yes, the Board backed him publicly, but what are they going to say to all the employees (the primary audience of all those management-related messages we selfishly think are directed towards us) “Hey everybody, your boss is probably going to be fired really soon. Happy holidays!”. We think not.

3)     Sentiment: The market is already speaking out loud on this one – something that started when someone had the inside information and started trading the stock down yesterday. In addition, when JCP reported its last quarter and issued the guidance (that it just blessed) the stock was at $8.71. Now with a reiteration of that guidance the stock is struggling to hold $7.50. That’s off 14% on a like for like basis. At the same time, sentiment is already the worst of any name in the S&P (see our sentiment monitor below which triangulates buy side, sell side, and inside transactions). There are 89mm shares short, or 30% of the float.  To put that in perspective before the secondary – when liquidity was a massive concern -- there were 67mm shares short. Now it’s far more heavily shorted despite having patched up the greatest market concern.  This is one thing that keeps us on the positive side.  




JC PENNEY (JCP) (#5 Out of 5 Ideas)

Not a day passes where I don't consider punting this one from the list of longs. Truth be told, it was much more fun being short Ackman at $42. But then I put back on my analytical cap, and come back to the fundamental premise of our long call. And that is that this company can be saved from its' widely accepted death. Our survey work suggests that consumers actually want JCP to succeed, even if Wall Street does not. To be clear, we're not talking about JCP returning to the mediocre retailer it once was. Today it is a horrendous retailer, and we simply think that it can upgrade to being a 'slightly better than bad' retailer. This is best measured by sales productivity. Today Kohl's is operating at $210/ft. JCP's prior peak is close to $190. Current day JCP is cruising along at a whopping $100/ft. We're not suggesting that it could get to $190/ft --- or even $150/ft. But based on everything we learned from consumers we think the JCP can revisit the $140 mark. That's still below Sears, by the way. That, combined with a mid/high single digit EBIT margin gets us to around $1.50 in earnings power. Now…unlike the other quality companies featured in this note, with JCP we've got to deal with another 2-years of cash burn. Two points of good news; 1) it has the cash, unlike earlier this year, and 2) the consensus has the company burning cash in perpetuity. That's simply not realistic -- unless our consumer research all of a sudden turns out to be flat out wrong.


So how do we value a name like this? We're uncomfortable using earnings given the debt burden. But a 8x EBITDA multiple -- which we think is fair for a company that is rebounding like JCP should and is de-levering, gets us to around $16-$17 in 2-years. Definitely the highest-risk double we have on the sheet, but it's one that we're sticking with -- until the research gives us reason not to.


JCP: Stuck in the Penalty Box - jcpstats


JCP: Stuck in the Penalty Box - JCP sentiment

[video] Keith's Macro Notebook 1/8: YEN AUSTRIA OIL

Still Bullish: SP500 Levels, Refreshed

Takeaway: The SP500 is still bullish because it continues to signal a series of higher-lows (1824 support) and higher-highs (1850 resistance).



While its fascinating to watch the same pundits who tried calling a market top for all of 2013 do the same in 2014, calling tops is not a process. It’s a marketing gig. We do levels, risk ranges, and research instead.


Across our core risk management durations here are the levels that matter to me most:


  1. Immediate-term TRADE resistance = 1850
  2. Immediate-term TRADE support = 1824
  3. Intermediate-term TREND support = 1762


In other words, the SP500 is still bullish because it continues to signal a series of higher-lows (1824 support) and higher-highs (1850 resistance vs. the all-time closing high of 1848 on DEC 31).


With mean reversion support -4% lower (1762), that’s not to say that buying-the-damn-bubble #BTDB on down days is for the faint of heart. It’s just a friendly reminder that it continues to pay the bills if you buyem right.


Win the day,



Keith McCullough

Chief Executive Officer


Still Bullish: SP500 Levels, Refreshed - SPX

get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.


Takeaway: We reiterate our Best Idea shorts: BLMN, PNRA, PBPB, MCD.

No real surprises here.  Industry data points are continuing to confirm our bearish stance on casual dining.


Last night, Malcolm Knapp released his Knapp Track sales results for December, estimating that same-restaurant sales and guest counts declined -3.8% and -5.2%, respectively, versus December 2012.


On a two-year average basis, the results imply a sequential change of -235 bps and -360 bps for same-restaurant sales and guest counts, respectively.


Knapp noted that only one of four weeks in December had positive comparable sales, while all four weeks had negative comparable guest counts.  Poor weather conditions negatively impacted the month, particularly in the first week which was also the worst week of the month.


According to prior accounting period data and these December estimates, we estimate that comparable restaurant sales and comparable guest counts declined -0.7% and -2.5%, respectively, during the fourth quarter. 


We will release more data when Black Box Intelligence reports, including what companies have seen their same-restaurant sales estimates revised over the course of December.




Howard Penney

Managing Director


Correlation Risk

Client Talking Points


Got beta on that Correlation Risk? The Yen is down -0.3% and the Nikkei is up +1.9%. Yup, that’s the game you are in right now; so play it until these correlations burn off. This massive net short position in the Yen notwithstanding (currently -143,000 contracts), the risk range for USD/YEN is actually tightening. That’s bullish for the Yen, on the margin. We continue to watch this closely.


Stocks in Vienna lead European gainers up +1% this morning to +4.3% year-to-date. The reason I call that out is because that’s one of the top 2014 global equity performers. It's still early, but we will explain why parts of Europe should continue to follow Germany’s lead on tomorrow’s Q1 Global Macro Themes call. 


Oil is up +0.2% this morning, but it's still bearish from a long-term TAIL risk perspective ($109.39 is a wall of resistance). All the while, Natural Gas (up another +1.1% this morning) continues to diverge bullishly. We will be writing more about Oil verss Natty (and shale) in the coming weeks.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Hedgeye's detailed and constructive view on the improving fundamentals in the M&A market with a longer term perspective is a contrarian idea at odds with the rest of the Street which is overly focused on short-term results. From an intermediate term perspective, M&A is poised to break out in 2014. We are witnessing record amounts of cash on corporate balance sheets, continued low borrowing costs and the first positive fund raising round for Private Equity in four years. Moreover, a VIX in secular decline (this has historically benefited M&A), recent incrementally positive data points from leading M&A firms that dialogue has improved, and an improving deal tally from Greenhill & Company (GHL) themselves coming out of the summer all bode favorably for GHL. So is a budding European economic recovery that would assist a global M&A market that has been range bound over the past three years. GHL stands out as a leading beneficiary of these developments.


We remain bullish on the British Pound versus the US Dollar, a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve) and the Bank maintaining its existing asset purchase program (QE). UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers, which should provide further strength to the currency. In short, we believe a strengthening UK economy coupled with the comparative hawkishness of the BOE (vs. Yellen et al.) will further perpetuate #StrongPound over the intermediate term.


WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.

Three for the Road


I disagree with $GS's recommendation to reduce exp to developed markets today; less importing means a stronger dollar @hedgeyeJC


"Your assumptions are your windows on the world. Scrub them off every once in a while, or the light won't come in." -Isaac Asimov


Unseasonally cold weather in the U.S. has led to at least 21 deaths and resulted in freezing temperatures in all 50 states on Tuesday, according to reports.

January 8, 2014

January 8, 2014 - Slide1



January 8, 2014 - Slide2

January 8, 2014 - Slide3

January 8, 2014 - Slide4

January 8, 2014 - Slide5

January 8, 2014 - Slide6

January 8, 2014 - Slide7

January 8, 2014 - Slide8




January 8, 2014 - Slide10

January 8, 2014 - Slide11
January 8, 2014 - Slide12


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.