The Daily Dose: JCP Before and After

 | Sep 27, 2013 | 8:16 AM EDT
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Ever just have one of those weeks in which you know you are rocking, but it comes at the expense of physical and mental health? That's the week I am having. Inquiries on a less-jazzed broader market. IPhone 5 going ding dong on a call on J.C. Penney (JCP) that has been added to my All-Time-Great List. Trying to understand how Nike (NKE) magically chopped 16% from its runaway demand creation expense initiative. Wow, what a week!

From the Notepad: #JCPenney

Here, you can have a sniff of the notes I sent out on Thursday at 12:05 p.m. ET and then immediately upon learning of the 96 million share issuance:

12:05 p.m. ET (pre-controller exit)

I continue to check off boxes on an internal checklist being kept on J.C. Penney. It's a process that I developed years ago when studying souring retail stories. So far, so good on JCP, everything unfolding pretty much in line to what we laid out six months ago. Here is the next thing to watch for on the company: questions, perhaps from authorities, on the presentation of financial statements. 

Financial statements are the lifeblood of a company, it's how they make the case for equity investors to buy the stock or hold on while the market is telling a different story. It's what creditors read in helping to determine a company's cost of capital. In a situation such as J.C. Penney, any concern regarding the presentation of financial statements could make it harder to raise needed capital, more penalizing to raise capital, as well as injecting fear into the market as it pertains to executive credibility.

Let's just say keep an eye out on the following with J.C. Penney; remember the company has an interest in trying to portray itself in a less dire set of circumstances than it may be by using less aggressive accounting methods:

  • How it accounts for pension expense.
  • How it accounts for accounts payable.
  • The raw same-store sales metric, which is no longer easily found as it's lumped in with Internet sales.

5:32 p.m. ET (post new share issuance)

Got the share raise as I expected and outlined in all of my notes. Bottom line is that J.C. Penney already borrowed off its real estate earlier in the year. Second takeaway is that this is likely the last round of external funds available for J.C. Penney, so time is of the essence to turn things around (and that means more than a +3% comp).

Flash Thoughts:

  • Ullman no longer has credibility (positive comments made). Modern-day pump and dump. New CEO needed ASAP to handle plans on using the cash raised.
  • Cash burn worse than expected in back-to-school (which is why they left out "total liquidity" comment Thursday morning in the press release, which I noted).
  • The company's internal processes are in serious question. You must question the truthfulness of the company's financial statements (related to controller news).

The Market: Treasuries Vs. Stocks

I have sensed a yawning personal disconnect from the message of the markets since Tuesday, so I want to conclude the week grounded by showing a simple stocks vs. bonds comparisons (don't be too enamored with Thursday's session). Oh, a completely random thought here. If the XRT takes out its Aug. 2 intraday high it could be a signal of a tasty elixir of a better-than-expected holiday season and low expectations, the latter made so following dreadful second-quarter commentary. 

There is a new development taking hold in the market after the Fed meeting.  Yields have returned to levels that the market in the past was comfortable with, sending stocks higher. In fact, 10-year yields are at their lowest levels in six weeks. The development is that while yield expansion has subsided, stocks have tumbled. 

To me, the read is that the summer economy, one where rising rates clearly impacted demand across many industries, now matters as companies begin to report numbers for third quarter and share depressing comments at investor bank presentations (and boy, have we heard some continued cautious tones regarding business conditions this presentation season).


Treasuries Vs. Stocks
Source: Yahoo! Finance


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