JCP: The Scoreboard Doesn’t Lie

Takeaway: If you focus on the P&L you’ll like 4Q. If you acknowledge this thing called cash flow, you’ll be scared off. Net/net = pos on the margin.

Conclusion: The puts and takes battle each other fiercely this quarter. Good improvement on the margin on the P&L, but cash flow went the other way. Net/net, let's face it...JCP never gets a win. This is as close to a win as its gotten in a while. That said, probably not enough for us to get back on board, as we think that the earnings power is there, but the right management team is not. For now, we're still 'JCP Agnostic'.



With the run that JCP had immediately preceding the earnings release, JCP needed to ‘bring it’ with this print. While the numbers on a stand-along basis were atrocious – it’s tough to argue otherwise, our sense is that there will be two camps emerging from this earnings report; 1) one that looks at the income statement, who will be upbeat about the positive changes on the margin (changes on the margin is what matters), and 2) one that is focused on cash flow and the balance sheet, which looked pretty depressing. The peer analysis below speaks volumes. You might argue that the P&L and Cash Flow might wash each other out. But the reality is that we’re talking about JC Penney here. It NEVER wins. The fact that it showed signs of life on the P&L is a positive that can’t be overlooked. As bad as the results were overall, they got better on the margin. That doesn’t happen a whole lot with JCP.


JCP: The Scoreboard Doesn’t Lie - dept store table


So does this mean that we jump back on board as one of the lone bulls on the name? We thought about it – very briefly. But the answer is no. Every bit of research we’ve done over the past year – including multiple consumer surveys – tells us that there’s $1.50 in earnings power buried away in there. And let’s be clear…we’re not talking about some phantom earnings power that will never be realized. We definitely think that $1.50 is attainable. But we remain hung up on our view that the current management team simply cannot make those numbers a reality. We acknowledge that Ullman can continue to steer the ship for another year, and productivity, earnings, and cash will all likely be in a better place. After all, this quarter alone showed a nice delta on some key line items. Let’s give credit where it’s due. But we don’t think Ullman is the guy to get JCP to a point where it actually makes money, which is pretty critical to us building up to a defendable value for this company.


Everyone will agree that this quarter was challenging for everyone. In order to get a complete picture of the financial landscape, let’s compare JCP to the other department stores that have reported numbers…Macy’s, Dillard’s, and Nordstrom. There are some pretty major comparative differences. Such as…

1)    First off, let’s start with the biggest commonality – which is same store sales. Every single one of them comped within 60bp of 2.0%. That’s as tight a grouping as we recall seeing in a long time. Of course, Kohl’s will probably destroy that trend when it reports Thursday.

2)    JCP definitely won with Gross Margin improvement of 461 bp, but it’s still sitting at a GM rate of only 28%, which is well below all of its competitors – even a dog like DDS.

3)    JCP also wins the comparison on the SG&A line – for two reasons. The first is the 458 bp improvement in the SG&A rate, but the more important one is the fact that it’s SG&A rate is still the highest out of the group by far. We don’t think that means JCP has costs to cut, but simply that it’s productivity can improve and naturally leverage costs.

4)    All good things must come to an end. Let’s move over to the cash flow statement. Cash from operations down 41%? Seriously?

5)    Free cash flow margins are half that of Macy’s, and with a 271 bp decline vs last year JCP is the only company in the group to post an erosion in free cash margins.

6)    Cash conversion cycle is perhaps the scariest due to a 27 day increase in days inventory on hand. You might think that the company made that up in part by extending payables, right? Nope, those eroded as well. All in, we’re talking a 31 day erosion in the cash conversion cycle. Yes, there was noise in the timing of inventory receipts. But cash is cash. Every other retailer improved it vs last year.


JCP: The Scoreboard Doesn’t Lie - jcp sigma


JCP: The Scoreboard Doesn’t Lie - departmentstore sigma

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$FB | $19 Billion Question: Does WhatsApp Have Any Value?

Takeaway: The acquisition price for WhatsApp is greater than its app's addressable market (assuming they can ever monetize it).

Editor's note: This research note was originally published by Hedgeye analyst Hesham Shaaban on February 20, 2014 at 15:02 in Internet & Media. For more information on our subscription service click here.


  • WhatsApp is a mobile messaging app with ~450M users (~70% are active daily)
  • WhatsApp will continue to operate as an independent & autonomous company
  • Facebook will pay ~$19B for the company ($4B cash/$15B in FB shares)

$FB | $19 Billion Question: Does WhatsApp Have Any Value? - w1 


Monetization Strategy = Slippery Slope

WhatsApp CEO Jan Koum suggested that they have a clear monetization strategy in place.  While WhatsApp is essentially free to download, in some instances, the app requests an annual fee of $0.99.  However that isn't largely enforced if the user declines to pay.  Further, the company is not running ads on the app; which means that they're essentially not monetizing the product.  


Jan Koum also suggested that monetization is not a priority for the company right now; deferring to 5-10 year window as his focus.  More importantly, the company is not planning to introduce ads to its service; suggesting the only means for monetization will continue to be the user, which is comical since FB doesn't even charge its users. 


The assumption that Jan Koum is making is that the WhatsApp user is sticky, and that they would be willing to pay something for a service that has a series of free substitute options.  While the cost is nominal, it would be a deterrent to growing its current user base, if not sustaining it, if the company tried to enforce the annual fee more aggressively.


Acquisition Price > Addressable Market 

The street seems to be justifying the $19 billion acquisition price on a cost/user basis; suggesting that FB is getting a good deal since it is paying $42 per user for WhatsApp vs. its own per-user valuation of $140; essentially a 70% discount.  The inherent flaw in this analysis is simple: the FB user is far more valuable than a WhatsApp user because FB can actually monetize its user base; likely by a much higher margin than is implied by the WhatsApp per-user valuation.


The more telling factor is that the $19 billion that FB will pay to acquire WhatsApp is actually larger than the total addressable market for the app.  The addressable market is as follows:  

  • Global Paid App Market: ~$20 billion
  • Global Mobile Ad Market: ~$15 billion.

Once again, Jan Koum suggested that he doesn't want to monetize WhatsApp via ads, so the current addressable market is the $20 billion Paid App Market.  In actuality, it's likely much smaller.  We're not sure what percentage paid messenger apps represent of the total, but given that most of these apps are free, we doubt it's a meaningful percentage (if any).  


In short, the current addressable market for WhatsApp is a small fraction of what FB is paying for the company.


Now the obvious counter is that both these markets are rapidly growing and will continue to do so.  We're not disputing that. But how much share can WhatsApp hope to gain in a market with existing competition that generally doesn't charge the end user for messaging services? We doubt much.





Hesham Shaaban, CFA



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New Best Idea Conference Call: LONG Lorillard (LO)

Hedgeye’s Consumer Staples team is adding Lorillard (LO) to our Best Ideas list.


We are hosting a conference call Tuesday, March 4th at 11:00am ET to discuss the key points of our high-conviction bullish thesis. Consumer Staples Analyst Matt Hedrick will answer questions at the conclusion of the call. Ping for access.




  • We’ll discuss our exclusive view on why we now believe Lorillard’s advantaged menthol portfolio is essentially shielded from regulatory risk.*
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  • Got growth? We’ll take a look inside Lorillard’s continued stable (and profitable) sales and earnings growth outlook.

*A supplemental expert report on menthol by a top Washington, DC law firm involved in tobacco public policy is available by request.



Attendance on this call is limited. Please note if you are not a current subscriber to our Consumer Staples research, there will be a fee associated with this call. Email to learn more about our research and how to subscribe. 

Ursine on $TGT + $CRI

Takeaway: Target and Carter's? Eek.

Editor's note: What follows below is a brief excerpt from Hedgeye Retail Analyst Brian McGough's morning research.


Ursine on $TGT + $CRI - new3


CRI - Carter's Leaves Much to Be Desired


So, Carter's (CRI) beat the quarter by a penny. That's obviously good enough in this tape. But the quality of earnings left much to be desired. Guidance was weak, but that's typical for CRI. They're a 'guide and beat' kind of company. But the SIGMA chart below really tells all here. The past five quarters have been a downward spiral. Margins are slowly eroding, while sales weaken and inventories build. Not good. While there are factors to explain some of this away, including international expansion, the fact is that when the line in the chart below goes down and to the left, it means that cash flow compresses.


Ursine on $TGT + $CRI - cha1


TGT - Be Weary of Target


You know what we just wrote about Carter's? Now substitute the word Target for Carters'. That pretty much sums it up.


The only real difference is that TGT's guidance in 1Q is worse than CRI's . It makes sense given that now they have to deal with their highly publicized data breach. We'll get more details on the quantification on the company's conference call at 10:30am. But it looks like Target has thrown a very beared-up scenario into their comp. But just because they set appropriate expectations, it doesn't mean that it's worth buying. Not by a long shot.


Ursine on $TGT + $CRI - cha2

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