NEW Update<---No Matter What JC Penney Posts, it’s in BIG Trouble

Here are six things to know.

Editor’s Note

Think: Did ANYONE call you up and deliver detailed guidance, backed up by in-depth research, to short shares of JC Penney six months ago?  How about an email on what to do after the company’s last earnings report 7 minutes after it hit the wires (stock popped, Wall Street was pitching hope)?  We did ALL of these things for clients on JC Penney.  Personalized guidance and powerful research are the foundation of Belus Capital Advisors, and is what sets us apart from the rest.  Learn more here.

Know These Things

Suddenly there is this tinge of optimism on JC Penney on the Street.  Go figure, a major shareholder that has gone off the deep end gets the boot and boom, JC Penney’s absolutely horrendous second quarter is being perceived as mere “noise.”  Newsflash: when a company has missed consensus earnings for six straight quarters, in fact posting massive losses, a quarter is not noise…it will be a rude awakening for those that have lost their investment discipline in order to headline chase.

From my viewpoint, even if the company shines some light on a promising back to school given recent accounts of that being the case, there are at least six major risks to the company that investors must be aware of seeing as they are going un-talked about.

Risk #1: Tapernado is Raising JC Penney’s Cost of Credit

  • JC  Penney will likely need  to access capital in 2014 to fund inventory purchases and capex.  With each day that passes in the market, especially with rates nearing 3% into Jackson Hole, bailing out Ron Johnson’s mistakes becomes costlier, penalizing any minor  success in bringing people back into the store.

Risk #2: Tapernado Could Hit Employment of Low Income Households

  • The  JC Penney consumer is the one working on housing sites with limited job visibility,  and variable shifts at chain restaurants.  Rising rates could choke off spending by the JC Penney shopper  during peak holiday periods.  That  would be no good for a company needs everything to go its way for the foreseeable future.

Risk #3: Day of Reckoning with New Credit Agreement

  • Under its newly expanded, $2.25 billion credit agreement, outstanding balances have to be repaid by April 4, 2014.  At the end of the first quarter, JC Penney had remaining availability  of $526.0 million.  The company will need a historic holiday season and start to 2014 to fund the payment of borrowings with cash on hand.

Risk #4: Rogue Shareholder on the Loose

  • Whether  Ackman sells his stake in increments or not, the fact is there will be supply coming to market as the company remains in a precarious financial  standing.  Not only does the threat of Ackman dumping hang over the stock, but the actual unknown of who will sop up the supply of stock at market price is a risk.

Risk #5: Lack of Financial Flexibility Under Credit Agreement

  • JC  Penney has had its Ford moment, borrowing against all its assets on a bet  that Mike Ullman can stabilize the business and hand it off to a new  person that will restore the financials.  The company has essentially constrained its ability to access to capital.

Risk #6: Dilutive Share Issuance

  • The probability is better than 50% that JC Penney, having borrowed to the max under its credit agreement and unlikely to explore a high yield debt issuance, will have to issue new shares in 2014 to raise capital.  Hello shareholder dilution.

Tweetable Things to Know

  • JC  Penney’s merchandise margin has settled into a new 29%-31% range (department stores usually in range of 37% to 39%), light years below the  2009 peak cycle performance of 39.4%.  In English, this means the company will have to drive more people  through its doors, each month (not just during holidays), to profitability  run the business.
  • All  credit rating outlooks are negative.
  • Macy’s is aggressively remodeling its stores, in many respects creating the “Middle  America Department Store of the Future.”  Goodnight JC Penney.
  • JC  Penney’s second floor shops were constructed in a manner that reduces the amount of goods available for sale on the floor.  This is a major structural issue, not to mention pockets of the second floor now resembling a collection of highly      unprofitable assets (test kitchens, for example).
  • JC  Penney is basically two companies: 500 remodeled stores and 500 un-remodeled stores (aka “zombie stores”), so consumers are seeing two  different and confusing views of the brand.

 ——>Update: October 2, 2013

Since this post on August 20, JC Penney has lost a controller and announced a new share issuance (as we said).  However, there is something brewing at the store level that I hadn’t felt at JC Penney during the stock’s upheaval in the past few months.  What’s brewing you ask?  Desperation, and in the case of a retailer that means a slow rise in the promotional cadence of the business by item and by department in order to drive cash flow.  On a personal level, and yes I am keeping track, I have not seen one customer in the furnishings section of the JC Penney stores I tour in a MONTH.  What I do see are throngs of employees trying to find things to do (no customers to help).  What I feel (and it’s hard to explain this, it’s an analytical six sense) is that 50% of the second floor in remodeled JC Penney stores are zombie zones; inventory sitting idle collecting dust because nobody is visiting Ron Johnson’s “experiences.”

JCP Pic 1

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And this new photo from October 5, 2013….

….shows the crazy amount of space JC Penney continues to waste on the second floor.  Can’t improve sales in the case of JC Penney if more space is given to props and open air rather than merchandise!