As promised, I spoke with J.C. Penney (JCP) yesterday. Here is what I learned:
- That the company is speaking with investors is significant in and of itself. If it was huddled with bankruptcy lawyers, no outbound communication would be going on - period. We had an hour-long conversation that was wide ranging and open in nature.
- The bottom line. The tone of the company was full of fight and defiant at the attacks that had been coming its way. It is fighting for equity, but right now views its vendors as the most important constituency. To make the equity work, it needs to keep the vendors happy, hence the equity raise. While the company still claims it could have made it without the raise, the GS report started what JCP feared would become a panic from nervous suppliers. $800mm in equity solved that problem. Now the trend of the terms is to get longer (industry normal) payment cycles, which will boost cash. admit that the raise was sudden and not intended until the noise of the GS report put a gun to their head. This has the ring of truth to me though it bagged all their investors, including the big 4 who appear to have mostly sold (my words not the Company's). They hated the dilution (that is what every company says) from the raise but felt they had to do it for the vendors. Despite all the rumor mongering, the liquidity plus the revolver availability of about $500mm extra give them the luxury of time.
- The vendors know as much about the company as anyone and post raise, are lengthening terms. They are not selling paper as far as the Company can see.
- Short Campaign: They have never seen anything like it in its depth and sophistication - coordinated tweets, blogs and sell side downgrades based on rumors. I asked if one of their former large holders could be behind it. They wouldn't be surprised but had no knowledge of it. The $1 target was based on an analyst who called people at the company who that person knew wouldn't return calls in real time so they could say that the Company was unresponsive. The Company will continue to fight disinformation so that investors can make informed decisions.
- Operations: Still a lot of SGA to cut. Ron Johnson had that right. They have costs of a $17 billion company and are $12 billion for now. Margins will get back to mid to high 30s where they used to be - look at the comps and where JCP gross margins used to be. The key is sales. Getting the customer back with coupons and other promotions. Pointed out that under RJ home store was closed for months, price points and merchandise was wrong for the customer, and billion dollar brands that customers liked where killed. It won't be easy to get sales back but most of the damage was self inflicted. Agrees with most of the JPM note of getting $2 billion back from merchandising, $2 billion from returning customers, GM back to mid to high 30s and SGA close to $4 billion if not lower should sales not flex. Those numbers could get you to $2-4billion in EBITDA (my estimates) and give the shorts a very tough ride.
- Negative press/sentiment. Analysts like to kick a company down:" look at Macy's five years ago and countless others." It will be hard work but its not like we haven't done it before and just two years ago.
- Where are the bottom feeders? Typically in situations like this you see the Teppers, Loebs, and Ichans of the world buy in and so far nothing. Without mentioning names, the company is getting inbound calls from name brand bottom fishers though Ichan is obviously not one of them. They said look for the 13fs when they come out.
- Bottom line. "No one knows anything yet." Black Friday hasn't even happened yet and they are still trying to undo RJ era. "If I don't know yet and I am getting daily sales runs, how can the shorts or anyone else for that matter know?"
The key to the company and stock working is a sales revival that will lead to EBITDA revival. They believe that is very very doable. They are fighting the good fight.
Additional disclosure: Positions can and do change at anytime without notice