J.C. Penney: Why Preserve NOLs If There Aren't Future Profits?

Jan.28.14 | About: J.C. Penney (JCP)

Amid the recent retail carnage, J.C. Penney (NYSE:JCP) management has been curious in its silence. They were "pleased" with holiday results, yet gave no December comp sales numbers after giving the previous four months worth of comps. My own view is that what started out as an outstanding Q4 in November (+10%) faded into a good, but not so special Q4 with the ice storm of December and January. I still believe what matters with JCP is the coming year free of both Ackman and RJ and with clean inventory and a new/old strategy, but investors in retail this January are shooting first and asking questions later. JCP does not get nor deserve the benefit of the doubt. With 20/20 hindsight, I wish I had shorted a basket of overvalued and troubled retailers against JCP (BBY, SHLD, LULU, etc.). Oh well.

I suspect we are about to see a change in management. CEO Myron Ullman, just took a job as head of the Dallas Federal Reserve and head of a national retail trade federation. These are two big jobs that you do not take if you are going to remain CEO of a turnaround. I doubt his board would even let him take the job if he was remaining on as CEO. Since time is running short to have a new CEO in place to set 2014 Christmas strategy, I suspect that former Saks CEO and current JCP Chairman, Steve Sadove, is about to be named CEO of JCP.

Sadove just created enormous shareholder value at Saks and would be the logical replacement. Ullman could be kicked upstairs to the Chairman's roll. More likely, he will move on and some other retail heavy hitter, like Tysoe, will become the Chairman of the board. I suspect if there was an outside candidate, we would know it by now and the Company would have announced it. Sadove has had enough time to learn the business and formulate an action plan. This announcement would be very good news. Myron has stabilized the ship, Sadove would get the market share and margins back. It's a very logical plan and the timing is perfect.

So, why is the Company not telling us all this right now and instead putting out cryptic press releases about lowering the poison pill threshold to 4.9%? A cynic would say that the move is to entrench the board so we don't get another activist to disrupt a complex turnaround effort. However, the more obvious answer is that the Company has $2 billion in NOLs that are valued at about $2 a share (about a third the value of the stock price). This asset is truly hidden, especially since the bears don't think JCP will ever be profitable again unless it files bankruptcy. I choose the view that the Company is taking the prudent course of action, especially given the churn in its shareholder base, to limit the chance that all this trading will trigger an arcane rule that limits the use of NOLs - akin to a change of control. This action is a signal that JCP's board and management thinks profits are coming soon enough - $2 billion of them. This news is good news.

Disclosure: I am long 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.

Additional disclosure: positions can and do change without warning or notice.