Myron Ullman Lulls J.C. Penney Investors To Sleep

| About: J.C. Penney (JCP)

"Horrific" and "boring" are the two words that immediately come to mind when thinking about J.C. Penney's (NYSE:JCP) reported results and the subsequent conference call, respectively. Oh, and that J.C. Penney executives need to turn their cell phones to "silent", not "vibrate", while in the middle of a conference call if they want investors to take them seriously.

Now, on to business. As far as the results versus analyst expectations, JCP posted a huge miss on both the top and bottom line. Operating margins took a huge nosedive due to weak sales and promotions. JCP posted gross margins were 30.8% and same store sales came in as a double digit decline. The company had warned in a press release last week, that these numbers were forthcoming. Revenues were down and the company lost an astounding $348 million, compared to $163 million the previous year.

The stock is positioned to gap down on open, around the $18/share region. If today's trading is anything like yesterday's after-hours trading, the stock is going to be all over the map today and into next week. A sharp move downward could mark a break of the recent uptrend that the stock has been in since the beginning of April. If the market flounders and investors continue to lose confidence, JCP could be testing its $14 support by mid-summer.

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CNBC reported:

This is JC Penney's first quarterly report following the ouster of Johnson, who was fired last month after a tumultuous time at the company's helm, marked by a sharp decline in sales. Ullman had previously served as chief executive of the company from 2004 to February 2012.

"Our objective is to put JC Penney back on a path to profitable growth. To achieve this, over the past five weeks we have taken critical steps to stabilize the business, including improving our balance sheet and ensuring we have our senior leadership in place," Ullman said in the earnings release. "With that accomplished, together our team is focused on developing and executing strategies to enable us to reconnect with our customer and improve traffic and sales, while operating with strong financial discipline."

The problem here, as I've pointed out in several previous articles, is that Myron Ullman was the CEO that got J.C. Penney into the mess that it was in to begin with. I've spoken about how I feel J.C. Penney has a macro-style problem, not one that can simply be fixed while retaining ANY of the old J.C. Penney model. Penney needs to rethink the entire sector of retail, not how to get their "old" stores up and running again. The stores themselves are the problem. It may sound extreme, but I'd even consider liquidating the stores and looking at totally different formats for sales; like being a strictly online company. While that may not be the solution, those are the magnitude of ideas that I think this company needs in order to re-find long term success and shareholder value.

I noted in a previous article:

The company is stuck on a mezozoic era branding problem, and has failed to make massive, paradigm shifting changes to their business. They are not focusing enough on online sales and younger generations, all the while seriously burning through cash.

So, Ullman reluctantly and monotonously took to the company's conference call yesterday and, using a tone somewhere between coma and REM sleep, gave a half-assed effort at defending his company.

On the call, Myron Ullman said:

Given the proven success of Sephora and the encouraging performance by Levi, IZOD, Liz Claiborne, Arizona, and JCP shops, (inaudible) remain a strategic emphasis and they are going to sell specific number of shops, we will test and build out the ones that customers clearly want.

We are also focused on making a stronger component of our business once again. lost significant sales volume in 2012, due in large part to merchandizes [sic] for in-stock issues as well as execution challenges.

Arizona? IZOD? Really? Those are the aces up your sleeve, Myron? Myron is pushing the branding and the business model that screwed J.C. Penney shareholders to begin with! This is simply more embarrassing regression from a company that has done everything over the last couple years except for move forward.

  • Burn cash on frivolous lawsuits? Check.
  • Waste your time arguing about Martha Stewart, who nobody in 2013 gives a damn about? Check.
  • Pork-laden compensation packages for executives? Check.
  • Hundreds of millions in net losses per quarter? Check.
  • Revisit the old business plan that doesn't work? Check.
  • Loading the company up with $2 billion in debt? Check.
  • Selling brands older than Bob Hope and Regis Philbin combined? Check.

Yup, J.C. Penney has really been nailing it this last year and a half. By nailing, of course, I mean "screwing"; and by "it", I mean "shareholders". This company has simply gone from spinning its wheels to moving backward.

Anyway, back to business. Aside from shuffling papers and vibrating cell phones during the course of the conference call, here's some other tidbits I took away.

  • Ullman and the analysts, throughout the entire call, continued to refer to their customers as "she", effectively alienating men's business.
  • Ullman used the extremely non-bullish phrase "we're encouraged" roughly 10 times.
  • The company advised that they are expecting to effectively be back to business and have restructuring finished and ready to execute for "Back to School" 2013.
  • Ullman pointed out that their main focus on getting margins corrected is going to be by addressing the SG&A.
  • Ullman seemed confident that the company had enough liquidity. I don't necessarily agree with that statement with the way the company is burning cash. Assets are valued at around $4bil, JCP has already tapped $1.75bil of that and is on pace to burn through that in just about a year.
  • They are re-implementing the home store, with several price points, and are impressed and -- dare I say it -- "encouraged" with what they've seen so far.

It's no secret that I've been bearish on J.C. Penney and I remain bearish on the company. As I stated in my previous article:

When I read the details about the apology campaign, I was dumbfounded. To me, it read like exactly what it is: J.C. Penney is begging its old customers to come back.

With the old customers, old CEO, and same-old branding, J.C. Penney has successfully chased its own tail for the last year, costing shareholders tons of value and crippling its own company.

I swear I would give J.C. Penney a chance of being bullish if there was something; anything in the slightest that I liked about this situation, but I don't. J.C. Penney is going to put itself on the path it was at before, to a slow and tired road to bankruptcy. The only trade I dare place here is selling short, or buying up some speculative out of the money calls.

If you're currently invested in JCP, it might be time to step back (again?) and take a cold, hard look at the direction this company is headed: 180 degrees backwards.

I was playing an options spread into earnings, but am going to be adding significantly to my short position with a couple of out-of-money calls as a hedge against anything that could trigger a short squeeze. About 25% of the company's shares are held short; usually this would give me pause about piling on, but I can't think of a case where it's more warranted than the disaster J.C. Penney has become.

As always best of luck to all investors.

Disclosure: I am short JCP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. I own JCP puts and calls and plan on possibly adding to my short position.