JCP – Key Conclusion From Analyst Meeting

Takeaway: We respect the fact that September was weak. But are people doing the math on the long-term plan? JCP guided up materially.

Conclusion: The weaker September trends are clearly taking center stage as it relates to the stock. But we wonder if people are internalizing that the company’s financial plan – its first believable one in at least five years – suggests that JCP will be squarely profitable in 2017. Sales productivity going from $108 to at least $135 (on the low end), and earnings between $0.44 and $1.05 -- keeping in mind that the Street is at a loss of ($0.17). One of the key things we needed to see from JCP (see comments below) was a line in the sand for when the P&L would turn a profit. While they did not spell it out explicitly, when you build up the components of the model the message is clear -- profit by '17. Tack on the fact that Ullman seemed to strengthen his posture that finding a new CEO is a top priority, and we think that the story strengthened today, not weakened (as the market suggests).  Are we enamored with the stock here? No. We’re not. It’s trading at a 23x a base-case earnings number three years out, and 22x current year EBITDA.  We have a real hard time finding any valuation support on this name, and quarterly volatility in the model is intense. But we think that JCP’s revenue and margin targets are defendable, and that it will continue to be a net share gainer on a consistent basis for the next three years (unless a new CEO derails the plan – it’s happened before). We’re comfortable enough sitting back and watching this one grow into its multiple, or getting involved if it gets any cheaper.



It’s stating the obvious that the market did not like JCP’s lower comp guidance for the quarter (low-single instead of mid-single digit comps). While we’d call the sell-off in the name today excessive given that company stuck with margin guidance and annual sales/earnings guidance, the reality is that nothing really shocks us anymore with how this name trades in reaction to near-term data points (particularly given an infinite multiple on current earnings and 30% of the float held short).


But we are surprised that people are not talking more about the company’s long-term financial targets.

1) First off, let’s simply acknowledge the fact that JCP finally has long-term financial targets for the first time in more than five years.

2) Second, JCP outlined $3.5bn in revenue as its internal goal by 2017. That equates to $148 per square foot, which tops the $140/ft we’ve been talking about since last year. The level that the company set with the Street was 60% of this level – that’s $2.1bn in incremental revenue, or a total of $135 per square foot.

3) JCP also gave a Gross Margin target between 36.5% and 37.0%, versus 29.5% last year and a current run rate of 34.5%. That’s on top of SG&A that should be held relatively constant, and a slight decline in interest expense as $300mm in maturities come due.

4) Add that all up, and you get to EPS of $0.44 on the low end, and $1.05 if the company hits its internal goal.


We’re certainly not betting on the company hitting its internal goal – not by any stretch. But let’s keep in mind that the consensus has JCP losing ($0.17) in 2017.  The company just took up expectations by anywhere between $0.61-$1.22.


Still a lot to digest from the day’s events. We’ll be back when warranted.




JCP – What JCP Needs To Say

Takeaway: There’s a gap between what JCP should say vs. what it will say on Wednesday. All it needs to say is “break even in 2016.”


Ullman & Co have a pretty easy job at this Wednesday’s JCP analyst meeting. Expectations are low, and this company has not articulated a long-term plan since Ron Johnson took center stage and then proceeded to destroy $8.6bn in shareholder value – or 87% of JCP’s market cap. Talk about easy comps. We don’t think it will take much to get people excited.


There’s sure to be information overload on Wednesday, but there’s only a few simple messages we want to hear.

  1. “Sales productivity of $140 by 2016”, up from $108 today. This includes Store productivity going from $98 to $120, and JCP adding another $500mm in e-commerce sales (much of which we think will come from Kohl’s).
  2. “Positive Earnings by 2016”. This would actually be a huge news event for JCP given that the consensus has JCP losing money…well…forever. We think that positive in 2017 is very likely, but 2016 is certainly possible.
  3. “Close 300 Stores”.  Our math suggests 300 stores that need to be closed. We identified each of them in an analysis in May, and outlined some of the salient points below. We’d peg a 25% or less chance in getting this announcement on Wednesday. But we don’t see how Ullman can stand up there with a straight face and say that the company is currently running the optimal fleet size. It’s too close to the holiday for him to send a message to 25% of his rank and file that they might not have jobs anymore. We expect some acknowledgement of a small number of store closures on Wednesday, with a far greater announcement coming in the new year.



We’re in the process of compiling one of our Deep Dive Black Books and will be hosting a call next week. We’ll be discussing several things, including…

a) What the Department Store landscape should look like (operationally and financially) when we enter the next economic cycle.

b) Detailed Revenue analysis for all the Department Stores – by category, consumer, and demographic.

c) Detailed Results of our latest Consumer Survey on the department stores.

d) Real estate deep dive – including overlap with stores that are likely to go away.

e) E-commerce – growth and profitability prospects for the companies and industry.


Here’s one chart as it relates to JCP that we thought was worth sharing. Each time we conduct our Consumer Surveys, one thing we ask the 1,000 department store shoppers is to rank which are their ‘go to’ stores in each product category. We don’t necessarily look at the results compared to one another, as Macy’s will obviously get more votes across the board than Lord & Taylor or Bon-Ton, for example. But we can gauge the incremental change for each company from one survey to the next (in this instance, 1Q14 to today).


There’s only one company that improved its ranking in every single product category – and that’s JCP.


JCP – Key Conclusion From Analyst Meeting - jcpgrid



Here are a few select highlights of the JCP Real Estate Analysis we conducted in May.   


1. Real Estate Approach: We did this analysis from the vantage point of a) optimizing JCP’s fleet, and b) seeing what the revenue impact would be for KSS. In order to properly assess the potential, we analyzed every JCP market to see where the most likely closures are, and whether or not they overlap with KSS. For starters, we did not simply map out store locations (a feat in itself) and draw a circle around each point on the map to gauge overlap by market. We mapped out a 15-minute driving radius around every store, which as you can see by the chart below is very different for every single store location in the country. This shows Tallahassee, FL, which has two locations where JCP and KSS overlap perfectly, and another location where JCP exists without KSS as a competitor. We did this in every market in the US.


JCP – Key Conclusion From Analyst Meeting - jcp2


2. Productivity Analysis. This next chart shows us what the implied sales per square foot range is for JCP’s 1089 stores. What we know is that in the US, JCP has 0.47% share of wallet in apparel, home furnishings and other relevant retail goods across its portfolio in aggregate – again, we’re looking at all expenditures within a 15 minute drive of its stores. If we apply that ratio to each market, we get implied sales/square foot levels ranging from $8 to nearly $1,000 (Manhattan). We know that share is likely to vary by market, so we’re not trying to say that these are the exact productivity levels of each store. But directionally, we think we’re right. And that direction tells us that 782 stores, or nearly 72% of JCP locations, are running below the system average of $98/square foot.


JCP – Key Conclusion From Analyst Meeting - jcp3


3. 300 Store Closures: We think that JCP needs to close 300 locations, at a minimum. We know that the demographic profile in the surrounding area of JCP stores in aggregate is about $66k in annual household income. We also know that JCP just identified 33 stores that it is closing. We analyzed those locations, and the demographic profile is $54k annually – that’s 18% lower than the portfolio average. So we looked throughout the system of JCP stores and looked to see how many other stores fit that profile. There are 300. If these stores are closed, the average income statistic goes up for the whole portfolio by 7% to $70k.  The 300 stores closed have implied sales/square foot of less than $38 annually. There are still almost 500 stores above $38 and yet still below the system average. 


JCP – Key Conclusion From Analyst Meeting - jcp4


4. Revenue Impact of Closures. Our math suggests that these stores would only result in about $550mm-$600mm in revenue loss to JCP. Importantly, KSS only overlaps in 42% of these markets. Our research shows that KSS took about 19% of the $5.4bn in sales JCP hemorrhaged over the past three years. If we apply a 20% share gain level to this analysis for KSS, it suggests about $73mm, or less than 0.4% to KSS in comp. If you want to get more aggressive and assume that KSS takes 100% of that revenue (which WMT won’t allow) you’re looking at about 1.9% in comp to KSS. We think something far below 1% is closer to reality. Here’s the sensitivity analysis below.


JCP – Key Conclusion From Analyst Meeting - jcp5

Cartoon of the Day: A Snail's Pace

Cartoon of the Day: A Snail's Pace - growth cartoon 10.08.2014


We’ve been telling you for months that growth is slowing. Now, we’ve entered #Quad4, too, where grow and inflation both slow.



Increase in Shale Gas Production Meets Transportation Capacity Constraints

Takeaway: Low-cost producers in the most lucrative regions will withstand volatile energy markets and realize margin expansion when prices rebound


Natural Gas is currently neutral on a @Hedgeye TREND Duration after testing, and moving below its $3.89 TREND Line of support late last week. The long-term TAIL line sits at $4.16.




Dry natural gas from shale formations continues taking share of overall production in the U.S., and this is expected to continue. Shale Gas has become the most important unconventional energy source because of the large amount of recoverable reserves:

  • Natural Gas from shale formations accounts for 40% of all U.S. natural gas produced, and this is expected to increase to 53% by 2040 according to EIA estimates

The increase in domestically available natural gas resources will benefit manufacturing industries that rely heavily on natural gas as a fuel or feedback:

  • The U.S. has approximately 31 Years of current aggregate domestic natural gas production in technically recoverable shale reserves (assuming all natural gas produced is from shale; ~60 years of recoverable reserves at peak estimated production levels)   


In our first note on the subject, we outlined some of the regulatory and capacity obstacles to becoming an LNG exporter:

Can The U.S. Shale Boom Be Stopped?

Highlights from the Note:

  • New law governing the LNG Terminal Approval Process enacted in August:
    • Simplifies approval process (less steps)
    • Shortens Approval Process
    • Currently, three projects have received approval for construction:
      • Sabine Pass (Cheniere Energy) in Louisiana was the first approved and generous estimates are that the end of 2015 for first exporting may be possible
      • Cameron Parish (Cameron-subsidiary of Sempra Energy) in Louisiana authorized to export the equivalent of 1.7bn cubic feet/day for a period of 20 years. Project expected to be completed by 2018
      • Martin Country (Carib Energy) in Florida expected to be able to export 40M cubic feet/day



Aside from regulation hindering our ability to become an exporter, what factors can prevent our domestic potential to reap the benefits of this seemingly plentiful production capacity?

In this note we’ll look at the positive evolution of marginal production efficiency fighting against structural transportation constraints creating larger gas premiums in some parts of the country.

Many domestic industries benefit from the increase in U.S. natural gas production:

  • Petrochemicals, fertilizer, and synthetic resins
  • iron and steel
  • Various energy intensive industries such as glass, paper and pulp, and plastics packaging

These industries make-up approximately 18% of total manufacturing output in the United States. Downstream, energy-intensive manufacturing industries that use natural gas a fuel or feedstock could increase production with lower fuel costs. However, with the lower profit margins from non-traditional shale plays, the profitability of projects is much more susceptible to energy price volatility. The average shale play in the U.S. is profitable at an oil price of $65/BOE, but in some of the higher cost regions, the $85-$90 range is a break-even price:  



I) INFRASTRUCTURE OBSTACLES: Capital Intensive and sticky without the margin guarantee (Invest now, benefit later) 

  • Midstream and Downstream infrastructure (pipelines, storage, refineries), as well as adequate water supplies are necessary for a shale revolution to exist:

The onsite production is ramping-up across the country, but refining and transportation availability is lacking causing large premiums in those regions where it’s difficult to distribute resources. Developing the infrastructure requires time, and the profitability of each project is at the mercy of unpredictable oil and gas prices.

  • Pipelines are mostly made of steel and cost between $2.8 and $15 million per mile:

Below is an example of the upfront capital equipment required for a project that will hopefully bring a future benefit to a producer:  

Marginal production costs in the Utica and Marcellus regions is in the $2 range and NYMEX Jan. nat. gas futures are trading around $4. (we’ll use the widest spread possible for illustrative purposes).

January nat. gas for delivery in New England is around $15. If a producer in Utica could produce and refine for, call it $3, the spread is $12, so why not build a pipeline? Assume a pipeline was built from Harrison, WV to Boston (656 miles) at $3M/mile (low-end of the cost structure).  The all in cost is $1.96Bn. Some of the gas could be transferred via existing pipelines, but most are already operating at full capacity. Since a pipeline costs an estimated $2.8m-$15m, we’ll discount the $1.96Bn to $1.75Bn (we already used the low-end of the range for laying pipeline).

A project that costs $1.75Bn upfront when no profits will be realized for years into the future is hard to justify, let alone hedge.      

  • As production of oil and gas outpaces pipeline capacity, railroads have filled the gap to a certain extent:
    • Carloads from ‘08 to ‘12 increased by close to 200,000
    • Crude oil and petroleum product shipped by rail increased 46% from 2011 to 2012
    •  75% of oil leaving North Dakota is shipped by truck to railcars

 The U.S. shale revolution has caused an excess of oil and gas shipped via railway that is clogging the transportation of agricultural products to U.S. ports. With record grains crops, transporting the supply to ports is proving difficult from a logistical standpoint.

  • “While the U.S. will reap the most crops ever, fourth-quarter export cargoes will be 15% lower than last year, according to RS Platou Markets AS, a Norwegian bank specialized in shipping. “
  • The Association of American Railroads says crude moved by rail almost doubled last year. The bottlenecks may persist because the Energy Department is predicting the most oil output in 45 years in 2015.
  • Railroad congestion has been a problem for grain handlers, Arthur Neal, a deputy administrator for transportation and marketing at the USDA, told a Senate committee during a hearing on Sept. 10. Since October 2013, the USDA has reported delays, missed shipments, backlogs and higher costs for railroad services for U.S. grain shippers, Neal testified.



Expansion in the industry is very susceptible to a drop in nat. gas prices, and the lowest cost producers, who are very selective of the projects they undertake, will survive. Natural gas prices are definitely a burden on producers, but are production costs coming down with an increase in efficiency?

Although an increase in overall drilling has ceased, the production of natural gas has increased dramatically. Companies can produce 6x the amount of natural gas they could from the same well in 2010. Smarter, more efficient drilling and better technology have contributed to the increase in well productivity in the last few years.  The Utica formation has come along next to Marcellus in the Northeast to become the most productive acreage in the country:

  • Cost of well in Marcellus was $10M in 2010 and it is now approximately $7M.
  • Marcellus and Eagle Ford have been the best formations for extracting shale gas; Utica is now taking the spot as the most efficient formation
  • At the same time the cost of drilling a well is decreasing, drilling productivity from each new well is increasing rapidly:
    • Drilling productivity in the Utica region has increased from 0.3 MMcf/Day in January of 2012 to an estimated 5.0MMcf/Day by August 2014.
    • This growth rate outpaced the growth rate in both the Haynesville and Marcellus regions during their fastest periods of growth (2009-11 for Haynesville and 2010-12 for Marcellus)
    • Utica is the fastest-growing region with the lowest marginal cost of production reported in the U.S.:

Rankings of Marginal Production Costs of U.S. Shale Plays (Lowest to Highest):

  1. Utica
  2. Southwest Marcellus
  3. Permian
  4. Northeast Marcellus
  5. Eagle Ford
  6. Granite Wash
  7. Niobrara
  8. Barnett
  9. Haynesville

Rankings of Natural Gas Production per New Rig (Highest to Lowest):

  1. Marcellus
  2. Haynesville
  3. Utica
  4. Niobrara
  5. Eagle Ford
  6. Bakken
  7. Permian

In 6 out of 7 of the major shale gas producing regions (these 7 make-up 95% of domestic production), the ratio of rig count/new-well production per rig has declined dramatically proving the great strides from a production efficiency standpoint.

With newly developed refining capacity in the Utica and Marcellus Shale, and the westbound service offered in Zone 3 of the REX pipeline (via the Seneca Lateral Pipeline), the low-cost production offered from these regions can now be utilized. An increasing amount of natural gas is being gathered and processed to meet pipeline specifications, allowing the gas to flow on interstate pipelines.


Increase in Shale Gas Production Meets Transportation Capacity Constraints - chart REX Pipeline

Increase in Shale Gas Production Meets Transportation Capacity Constraints - REX Pipeline Zone 3


CONCLUSION: Now that the refining and transportation capacity is developed, continued growth in Marcellus and Utica will be fueled by both the geological properties of the Utica formation and the evolution of horizontal drilling and hydraulic fracturing expertise after nearly 10 years of drilling shale and tight formations. 

The sell-off in oil and natural gas prices testing higher cost shale plays will differentiate those producers with the most efficient projects in the lower cost regions.

Please feel free to reach out with any comments or questions.


Ben Ryan


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

VIDEO REPLAY: Semiconductor Industry Teach-In

On Tuesday we hosted a Semiconductor Teach-In. We encourage you to check out the Video Replay below.


Contact for more information and to gain access to the full 74 page slide deck. 


Semiconductor Teach-In Overview:  We are proud to bring you the sector's best 1-hour teach-in on the Semiconductor Industry. We answerd the following questions: What drives chip firms’ fundamentals? What stocks are bucketed into which chip sub-sectors? What is the difference between analog, digital, and mixed-signal chips? What drives the Semiconductor Cycle? How do we track key metrics here? How do global inventories, chip leadtimes, bookings and billings impact the Semiconductor Cycle?  


Target Audience includes new tech investors, generalists, & income investors. This teach-in is great for New Technology or Semiconductor investors, Hardware, Software, Internet, or Telco investors that want more knowledge about the Chip space, Generalist investors, & Income investors. 

PODCAST: London Calling

We caught up with Hedgeye CEO Keith McCullough in between investor meetings in London. Keith tells us what’s on the minds of those investors.


Reality Check: Hedgeye Nailed Two of the Biggest Macro Moves This Year | $TLT $IWM

Takeaway: What a year it has been to be buying the Long Bond on dips.

Reality Check: Hedgeye Nailed Two of the Biggest Macro Moves This Year | $TLT $IWM - 10.08.14 Russell vs. UST 10 YR yield


Reality Check: The Russell 2000 draw-down (which we’ve been warning our customers about endlessly) has hit the Russell for a -10.9% move from its July high.

Meanwhile, the 10-year Treasury yield (which we’ve also been warning our customers about endlessly) has round tripped all the way back to 2.35%. Two big, non-consensus macro wins.


Got #GrowthSlowing yet?


It was just a little over a month ago that David Tepper was on Bloomberg proclaiming the “beginning of the end” of the bond bubble. We were (and remain) successfully on the other side of that trade. The 10-year yield is officially in crash mode (down over -20% YTD).


Yes, it’s been a great year buying the Long Bond via TLT on dips…. Cue the consensus crickets.

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.