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Introduction

J.C. Penney (NYSE:JCP) is really making it tough on themselves. Rather than just going full bore into either Ullman's old Penney's or Johnson's "new" Penney and just driving the company in a straight line to bankruptcy, the company and its board seem a bit masochistic; seemingly intent on twisting the knife as much as possible before, what this investor argues, the inevitable occurs.

I started calling J.C. Penney a short in the first quarter of 2013, in the midst of all of this mess. JCP currently is trading at $13.24, down 24.3% in the last three months, down 33.3% since beginning of 2013, and down 40.5% in the last twelve months. Although showing short signs of life on small pieces of news that was viewed as good by investors over the last 6 months, the stock hasn't been able to eclipse $20 in the last 6 months.


(Click to enlarge)

A Johnson-Less Company

Hedge fund manager and J.C. Penney board member Bill Ackman was the original suggestor to put former Apple (NASDAQ:AAPL) executive Ron Johnson at the helm of J.C. Penney, citing that Johnson had a vision to transform the stores to an upscale look and feel. When he started, it was argued by Ackman that Johnson's "record of retailing success makes him the ideal leader to fix JCP."

Johnson had, in Ackman's defense, a great record in retail; most recently starting the Apple retail trend. J.C. Penney, on the other hand, was a cat that Johnson couldn't skin.

I'm going to quickly sum up what my past arguments had been against J.C. Penney and Ron Johnson, and then I'm going to tell you why, from the outside, it looks like this company just simply can't seem to screw itself fast enough.

My readers know that I have been bearish on J.C. Penney for months now, claiming it was going to go under several times in articles like "The 8 Point Path to J.C. Penney's Obsolescence."

As I said in that article, Johnson's sub-store "no sale" solution was not enough to save this company. I wrote:

Ron Johnson's big move since he's come on has been to introduce brands; some already carried by Penney and some not, to have their own "store" within a store.

During Johnson's tenure, I wrote a comparison of JCP with Eastman Kodak. I wanted to point out, before what I thought would be Penney's impending demise, the similarities between what I feel are two iconic American brands that are both going to be facing the pitfalls of bankruptcy at one point or another.

I cited that Johnson's plan was inherently risky due to the cash that it was costing the company, and I also pointed out that while some of the brands were new and likable (Sephora, Joe Fresh), the company still seemed to rely on older, stale, J.C. Penney-esque brands like Levi.

It wasn't soon after that Johnson was given the heave-ho, and Mike Ullman was brought back to the company as CEO on an "interim basis."

J.C. Penney Begs for Business

The first thing that happened when Ullman was brought back on as CEO was that the company started a massive PR campaign to apologize to customers who had defected from the store during Johnson's tenure as CEO. I'm not sure what the PR company that organized this was thinking, but to this investor, it came off as nothing short of begging for business.

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 argued previously that there were major issues that I took exception to with Ullman coming back to the company. First, he was the original CEO that screwed the company. Secondly, for some ungodly reason, he thinks he's worth $1 million salary; absurd, and an insult to shareholders. Third, the board of directors tipped their hand that they were scared for the future of the company after ending Johnson's tenure in just 16 months - hardly enough time for the guy to fully implement his plans; regardless of whether I thought they were going to work or not. The board was, and remains, vulnerable and volatile - not a good combination for a company trying to save itself.

As I stated in a previous article:

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 had been arguing all along that the company needed a drastic, paradigm shifting plan in order to right itself:

J.C. Penney needs to take on something massive with its rebranding, and it simply hasn't. For all intents and purposes, the store styles are the same, most brands carried are still the same, the logo is barely different, and the changes made are not monumental and paradigm shifting enough to knock Penney out of the rut that the store's brand has inadvertently fallen into.

and

What J.C. Penney is doing with segmenting its stores is the same thing Kodak did with Advantix. Instead of completely letting go of the old and doing something totally paradigm shifting, they're trying to weld together the old failed model with some new ideas; in essence creating a hybrid mash of ideas that won't gel well together.

and

The company is stuck on a Mesozoic 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.

Also, let's not forget the time and money that company has spent during both Johnson and Ullman's tenure over this stupid, ridiculous, resource draining fight for Martha Stewart; a brand that nobody really seems to care about anymore. I argued:

Martha Stewart, no Martha Stewart : dealbreaker for the company? Probably not. I realize that the Martha Stewart brand name captures a certain demographic of shoppers, and that they provide a significant revenue stream wherever they are sold, but again, we're missing the point.

Nobody in my generation or my child's generation is going to have the same fixation on Martha Stewart or her products. In the era of Target offering up hip and quirky looking styles and brands like Thomas O'Brien and Threshold, J.C. Penney is looking backwards, not forwards, by wasting time dealing with Martha Stewart's brand. The price points of the alternate, more stylish brands are what they need to be focused on to take these housewares into a new period for their respective stores. The styles that are selling for my, and future generations are along the non-gaudy yet still hip lines. This is why stores like Anthropologie continue their success while brands like Martha Stewart continue their slow, inevitable fade into oblivion.

By the time J.C. Penney had come right out in their annual report and announced that things were moving slower and costlier than they had hoped, my mind was totally made up.

"Any changes to our strategies could be substantial, and if implemented, could result in significant additional costs," the company wrote in the report filed with the Securities and Exchange Commission.

Mike Ullman, Part 2 : The Search for Curly's Gold

So, one of the major issues that the company faced after Ullman was put back in was the fact that the pressure cooker was still on with regards to time running out. I argued that it was then too late for the company to make the major changes it needs; and I'll argue again that it's sure as hell too late now to make those changes without significantly diluting the stock or coming up with some other method du jour of annihilating shareholder value.

Ullman's checklist when he came back was hilarious, as I had pointed out in a previous article.

  • 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.

Ullman had once again placed his bets on the iconic powerhouse brands like Izod and Arizona. Arizona? Izod? Really? Those were the aces up your sleeve, Myron? Myron was pushing the branding and the business model that screwed J.C. Penney shareholders to begin with! This was simply more embarrassing regression from a company that has done everything over the last couple of years except for move forward.

Then, Myron promptly came on and reported earnings on May 17th, lulling myself and presumably most other investors to sleep. The results were horrible, the call was horrible, and I reaffirmed (for possibly the millionth time) my bearish sentiments on the company as a whole:

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.

Continued Three Ring Circus With the Board of Directors

So, it was announced earlier this week that the company was - wait for it - once again looking for a new CEO. Bill Ackman, who sits on the Board and who I generally respect as an investor, led the charge.

It was announced by CNBC.com on Thursday that the board had "erupted into a fight" - not usually what you like to see from a company that's arguably starting the proverbial "bowl circling":

The board of J.C. Penney erupted into a fight over the retailer's future on Thursday, as hedge fund manager Bill Ackman demanded a faster search for a new CEO and the board countered that he was being "disruptive and counterproductive."

In April, Penney abruptly dismissed former Apple executive Ron Johnson, and brought on Mike Ullman to replace him on an interim basis. Yet in a letter to Penney's board obtained by CNBC, hedge fund manager Bill Ackman - one of the company's biggest investors - voiced frustration that the process to fill the job permanently has not advanced quickly enough. He wants a new chief installed within the next 30-45 days, the letter said.

Saying that he was "very concerned" about the company's future, the hedge fund manager pressed the board for a clear succession plan - expressing concern that the process had taken as long as it has given J.C. Penney's widening problems.

Furthermore, it was reported on Friday that Bill Ackman is thoroughly pissed off and that he was demanding that the company's board meet as soon as possible and that the Chairman of the board, Tom Engibous, be replaced. Ackman wrote a letter that went out to the board on Friday:

In his letter, Ackman advocated another management move-claiming former Penney CEO Allen Questrom has conditionally agreed to return as chairman-an assertion that Questrom told CNBC is not a done deal. He said he won't come back under hostile circumstances.

"[Questrom] is not the right guy for this job," Sonnenfeld said. "Allen Questrom served for three-and-a-half years, almost four years. What did he do as CEO? … Almost the same thing as Ron Johnson, miss the customer base of J.C. Penney."

Meanwhile, Penney's current chairman Thomas Engibous said Thursday evening the board "strongly disagrees" with Ackman, and was "extremely disappointed" that his letter was made public. He also called Ackman's latest move "disruptive and counterproductive."

It was later reported on Friday that Ackman offered a second letter to the board as a peace offering - I'm not buying it. It's also been reported as of 1:30 pm on Friday that the Board has "joined hands" to come together and save the company. Save it, guys, you're not fooling anyone.

Anybody with a sixth grade education and decent common sense can tell you that the company absolutely cannot afford to be going down this road right now. Even if the Board was making nice with one another and working together to get a plan done, this company would still be out of reach for saving. Now, they're twisting the knife and just making it worse on themselves, stockholders, and the people that need to read the press on a daily basis surrounding this situation.

And so, this is how we head into the weekend - with the J.C. Penney board at each others' throats over a company that is so bruised, battered, disoriented, and detached from reality that it's running around like a crazy headless chicken.

Conclusion

The ground that this company is standing on has never been shakier. I would consider investing in J.C. Penney at this point an extreme risk of serious loss.

SA Contributor AquaResearch contends that the company is "one recession away" from an equity offering:

Those interest costs also make the company extremely vulnerable. I believe the company is one recession away from having to undertake a large equity offering. Even without a recession, it is possible it will have to raise equity, e.g., if the company doesn't get its customers back fast enough to cover its bills and interest.

I'd contend that this is true, except an equity offering is being too kind. This company is one recession or one retail sector crash away from it's inevitable end. The question in this investors mind isn't "if" J.C. Penney is going to go under, it's when.

Back to the "sector crash" idea for a second. I've been contesting that there are tons of retail stores that are past their prime, including RadioShack and Sears. These stores are giving way to all-in-one discount stores like Target and Wal-Mart (NYSE:WMT); stores that have been consistently overperforming other retail stores and are focused on building their online business. These, I still believe can be catalysts for a general slowdown in retail that could negatively affect J.C. Penney.

Again, as I've said in the past, the only possible saving grace for this company would be to trim a ton of the assets, get the company lean and clean with a brand new business model, and recreate themselves. Unfortunately, it's far too late for J.C. Penney, who remains dead in the water. I don't like seeing companies fail; nor do I like to see money wasted and jobs lost, but all roads in my head lead to J.C. Penney not making it but a couple more years.

If you're long here, why not pick up some 2015 puts as insurance? A premium is a small price to pay for some protection, and if the company can pull a rabbit out of their hat and survive, chances are the premium will be a long lost afterthought if the stock can grow from its current point.

If you're looking to enter a position in JCP, short is the only way to go (still, even in the midst of nearly 40% gains from when I first called it a short). If not, enjoy watching this one from the sidelines; as we head closer to zero hour, the drama is likely to ramp up and it should be an interesting case study years from now.

I wish all investors the best of luck.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Source: J.C. Penney Dying Like A Crazy Headless Chicken