December 05, 2013 - 11:14am EST by
2013 2014
Price: 9.00 EPS -$6.44 -$2.95
Shares Out. (in M): 305 P/E NM NM
Market Cap (in $M): 2,720 P/FCF NM NM
Net Debt (in $M): 4,400 EBIT -145 -800
TEV ($): 7,120 TEV/EBIT NM NM
Borrow Cost: NA

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  • Retail
  • Bankruptcy Risk
  • Distressed


JCP: Short. Target Price, 0

After all the discussions of the bonds value (debating if they are worth 60c to 80c on the dollar, and recovery of the senior loans) there seems to be the most obvious trade that hasn't been posted - JCP is very likely going to go bankrupt, while the market is pricing in a significant recovery in the equity.  I was hoping to have more time to write this up, but as the market is quickly catching on that JCP won't turn around, the stock is collapsing (down 10%+ in a little over a day)

What the market is pricing in?

JCP is trading at 0.6x EV/Sales. This is actually the highest over the past 5 years! The range has been 0.25x - 0.6x.  However, now JCP is hemorrhaging  hundreds of millions of cash / year (likely $700mm+ in CY2014, which will continue to increase its EV) and  is underinvesting in its store base.  The best comps may be SHLD (trading at 0.27x sales) or BONT at 0.46x.  The bulls love to point out the discount with Macy's on this ratio (0.9x), but Macy's historically has always traded at a higher EV/Sales ratio given its better franchise / productivity sq ft / margins. Debt to Sales for JCP is around 0.4x now, implying no value to the equity

Why EV/Sales?  When companies are unprofitable, it's good to see what the sales could theoretical generate in margins and translate that to an EV…. and this implies not much upside for JCP

However, the sales aren't coming back.  After the flutter of excitement over a 10% comp in November, the stock has been weak. Why?  Sales were down 38% last November, when there was little promotion, Hurricane Sandy, and closed stores in Thanksgiving. This November JCP threw it all against the wall - Veterans' Day promotions, Thanksgiving openings, promotions, Black Friday, etc, and comps only went up 10%... i.e. so they started at 100 in 2011, went down to 62 in 2012 and now went up to 68 in 2013… they are still so far below where they need to be, it’s a foregone conclusion.

Why do they need the sales?  They have  high fixed costs (which they have overly cut SG&A) and need the gross profit to make the company work.  If sales don't rebound another 25%+, company is going bankrupt (i.e. 2-3 years of 10% comps starting in 2014, but comps get harder from here on out)….  Unfortunately for JCP, competition has expanded and customers have moved on and are unlikely to return.  The store was weak pre-Ron Johnson (which is why they gambled the company on the new strategy that failed miserably), now its likely over.  Even if they are able to return sales 25% higher, the company will still be trading at 0.5x EV/Sales, towards the high end of its range (will still need to incure around $1bn in more debt/equity even under the bullish scenarios) - and then it will be breakeven-ish margins 

So, if they are able to return to profitability, what's the upside?  Given the large amount of debt and equity issued, not that much.  Especially since more will need to be issued over the next few years assuming they can turn around.  We think it is trading around 6x - 7x FY 2010-2012 EBITDA. . .  so not playing for much more juice.   Looking for anymore is unrealistic given the competitive moves in the industry and JCP's incrementally worse positioning over the years

Can this management team turn it around?  Remember, this CEO was fired for bad results to bring in Ron Johnson. Now the question is will the file for bankruptcy to get out of the crushing debt burden and bad leases in underperforming stores, while also granting themselves new options?  If management files, it will be to save the business before it further deteriorates, while blaming it on the failed Ron Johnson experiment.

At the end of the day, JCP is one of many retailers selling comparable items. Unfortunately for JCP, its target customer base has eroded and gone to other retailers while the company has taken on a crushing debt burden.  Many retailers go bankrupt due to missteps and markets changing, maybe the market remembers the company JCP once was (and that is the opportunity to short the stock) - but those days are over 

Note: We are short the name and may cover or add more at anytime 

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.


 Continued large cash outflows, weak earnings, attempted return to capital markets, bankruptcy filing
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