Adrian Balboa emphatically told Rocky that "fighters fight." In my world, the spirit of those words lives on in this self-made wallboard post: "researcher research." I want to cut to the heart of the story on JCPenney (JCP) after its negative-information dump this evening.
To do that, one has to take the severity of the operational shortfalls on the top and bottom lines and dig, dig, dig. Here is how I connect the dots on the quarter:
- Standard & Poor's downgraded JCPenney's credit rating on March 7 to junk status, weeks after a mid-February downgrade by Fitch. The rating outlook was stable for Moody's, S&P and Fitch as of JCPenney's 10-k issuance on March 28. These stable outlooks are now put in jeopardy, and that may negatively affect JCPenney's cost of capital under its revised 2012 credit agreement. (It essentially makes store initiatives more expensive and hurts long-run returns.) The revised agreement pushed JCPenney's availability to $1.5 billion -- talk about perfect timing.
- Does significant stakeholder Pershing Square ride this storm out, a storm that is indeed requiring more time to lessen in severity?
- Despite the stock's fall from grace in the first quarter, there was still a Jamie Dimon-like premium built into the valuation for JCPenney on the hopes that Ron Johnson could revive this relatively lifeless fish. Credibility has indeed been hit from different angles this evening, all of which results from the over-selling of the turnaround story months earlier. The first lesson is that you don't alter the mind-set overnight of consumers who for 20-plus years have expected to see discounts by JCPenney in weekend circulars while sipping coffee. Two, the dividend cut rattles the confidence of the institutional shareholder base; you don't want institutional shareholders unloading, obviously. But by cutting the dividend, there does arise this passing thought that perhaps JCPenney does not have the balance sheet to fund its bold turnaround plan, therefore requiring more debt on top of an already leveraged balance sheet.
Note this from the latest 10-k:
"Our 2010 and 2007 debt issuances contain a change of control provision that would obligate us, at the holders' option, to repurchase the debt at a price of 101%. These provisions trigger if there were a beneficial ownership change of 50% or more of our common stock and, for the 2010 issuance, if the debt is downgraded from the Company's credit rating level at the time of issuance, for the 2007 issuances, if the debt was rated non-investment grade. This provision applies to $1.1 billion of our debt."
The conference call will certainly be chock full of intrigue as optimistic analysts meet a likely humbled management team. No reason to shift from my underperform rating on the stock.
To see my pre-earnings comments on JCPenney, please go here.
