Does JC Penney Management Have Any Visibility?

Does JC Penney Management Have Any Visibility?

With the holiday season quickly approaching, J.C. Penney announced a massive equity raise, diluting shareholders to the tune of 30%. It must not be very confident about its prospects for the season most vital to retail chains. If that's not bad enough, there's something in the 8-K that many investors may have not caught: "Company said it is starting to see greater predictability in its performance across many areas."

Yet the same 8K forecasts $1.3 billion in liquidity for the end of the year. Recall from the most recent conference call, just a tad over a month ago: "we fully expect to be in great shape by the fourth quarter...we expect to have $1.5 billion of available liquidity at year end"

Now the new 8-K says $1.3 billion, down $200 million in a month. So much for "greater predictability." In a single month it lowered its liquidity guidance dramatically. Further from the month-ago call, again repeated, but with more confidence: "I think when we look at what we're seeing right now over the last several months and the improvements that we've experienced and then what we're seeing early here in August, I think we're very comfortable that the $1.5 billion liquidity is in line for year end."

The company said "very comfortable" yet lowered its guidance a month later? How are investors supposed to have confidence in management's "greater predictability" when it can't even hold out on its "very comfortable" forecasts for even a month?

Seasonal Hiring
Actions often speak louder than words. J.C. Penney plans on hiring 35,000 holiday workers for its over 1,100 stores which comes out to around 32 temporary workers per store. Meanwhile, competitor Macy's plans on hiring 85,000 holiday workers or nearly 100 per store. Macy's is apparently a lot more confident about its upcoming increase in foot traffic than J.C. Penney is. Kohl's plans to hire 53,000 workers for its over 1,100 stores or just under 50 temporary employees per store.

Consider this - the average square footage of a Kohl's store is just 86,500 feet while the average J.C. Penney is over 20% bigger. You could break it down to number of employees hired per square foot of store floor space, and you'll get the picture. Macy's and Kohl's are bracing themselves for a robust holiday season, and J.C. Penney's appears to be bracing itself for another disappointing holiday season.

The Positive
I guess the positive takeaway is that at least J.C. Penney got a large infusion of capital from sophisticated investors and funds who believe there's hope. The cash infusion will certainly get it through the holidays at the very least and give J.C. Penney a chance.

Either that or perhaps the investors are simply throwing good money after bad. It doesn't appear to me that management is all that confident in a strong holiday season, despite its words. It is still not able to predict the future with even a remote degree of accuracy. Coupled with a large equity raise at 15 year lows, this leads me to believe investors should avoid J.C. Penney and shorts can sit back and relax. If management can't figure out what's going on, how can investors?

Investors might want to take J.C. Penney's claim literally that it is "starting" to see greater predictability, meaning it's simply not there yet. It reads to me like a confession that it didn't know which way was up until recently and still might not. Not exactly confidence inspiring.

It's not like J.C. Penney has a history of delivering surprisingly good results anyway. In fact, it has a consistent history of missing expectations and estimates. Are investors to believe that this time is different? One thing for sure, if it sees "greater predictability" and its diluted shareholders this much at this time with the stock around 15 year lows, I think its actions speak louder than its words: brace for more pain, shareholders.

If J.C. Penney was serious about its turnaround, and confident in its success, one would think it would have a lighter equity raise, it would be preparing for a robust holiday season like its competitors Macy's and Kohl's, and it would wait a bit for higher stock prices to do any further raises rather than kicking shareholders while they are already down on the floor.

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