The crux of the bear case on J.C. Penney (JCP) as near as I can tell is that they can't get back to former sales and margin glory. I have written articles about how and why I think they can get there by undoing the Ron Johnson damage. But don't take my word for it. Let's look at gross margins and SGA as percentage of sales for their true comps. Look at the Bloomberg trailing twelve month retail GM and SGA comps to see how realistic it is to assume nothing can get better:
Hmm, there's some room for improvement.
No department store has gross margins of less than the 36% I have been modeling as a base case scenario. On $12 billion of sales which is down from $17 billion when RJ came in and almost $20 billion a few years ago, a 12% improvement to the mean would be over $1.4 billion in savings and implies $3.1 billion of absolute SG&A spend. Is this realistic? Probably not, which is why I am only modeling $4 billion of SGA (a 10% cut in dollars spent in 2012 and what Q3 2013 run rate looks like.). Interestingly enough, the SGA expense would be 33.3% of sales on $12 billion which is toward the high end of any of the comparable companies. It would be wrenching to get much lower, but maybe selling off the three private planes would be a good start and an indication that all is not so lean in Plano. It is my experience in an organization the size of JCP, you can always get 10% of costs out. Interestingly enough, on $15 billion of sales, $4 billion of SGA is 27% which puts them in the top tier of comps but is not unachievable.
Since the company has over $2 billion in liquidity projected at year end, they have time to right size expenses to a lower sales number if things don't improve on the top line. But remember if JCP can return to gross margins in the 39% range with SGA at $4 billion and get there with $3.5 billion of net debt (a moving target that could be higher or lower depending how quickly the turn is), you will have about $1.85 billion in EBITDA. At 6x that number, the stock will be worth about $24 per share. 7x yields $30.
Bottom line, I would argue that with higher margin private label coming back and positive comps for the first time in two years, the burden of proof for why we can't be average is on the bears.
Additional disclosure: Positions can and do change at any time without warning or notice.