JC Penney Can Go All the Way

First off, Bill Ackman is hurting JCP more than helping.

But it wasn’t long before trial-watchers discovered that Martha was wooed into a separate and seemingly parallel deal with JCPenney with the help of Bill Ackman, the always confident and controversial hedge-fund manager who has a huge stake in the ailing retailer.

“Great work, Bill. You get a huge assist here,” crowed Johnson in an e-mail after Martha signed on. “We put Terry in the corner.” Court-ordered arbitration will determine whether that boast is true.

Martha had an exclusive deal with Macy’s and was lured to JCP and now people need to pay. On top of everything else afflicting Ron Johnson at JCP, he may soon see his stores without products on the shelves, depleted of the Martha Stewart brand, all thanks to “Montauk Bill” Ackman.

But what else is JCP up to, aside from the once legendary god of retail, Ron Johnson, crashing the company balance sheet into cinderblocks made from dynamite?

Their sales down 31%, that’s what.

The company now has less than $1 billion in cash and has been delaying accounts payable to preserve cash. Last quarter, they’ve stopped paying people for their products for a new high of 48 days (up from 34), in order to “save” $214 million in cash.

Ron is trying to convert JCP from a coupon clipping discount retailer to high end. It’s laughable, really. Only a true narcissist, devoid of basic common sense, like Bill Ackman, could believe in such a strategy. Legacy store sales for “everyday prices” declined 36% YOY and 33% in Q3.

After Ron crashed the JCP balance sheet into cinderblocks of dynamite he announced that they’re gonna bring back coupons, since people like them. Johnson to date, they’ve only converted 11% of stores to his moronic vision. It will cost JCP, on average, $1 billion per year to convert to the new–higher end stores.

Bond holders say no, with paper trading anywhere from 10-30% below par. On top of that, JC Penney CDS are now above 1,000, a level seen by all of the winners of bankruptcy, just prior to their demise.

Two things are going to happen if JCP is to survive.

1. Ron Johnson will be fired.
2. JCP will issue a massively dilutive secondary to shore up the balance sheet, at a big discount to current prices. They need to raise $1 billion, right away.
When this happens, Ackman’s thesis for owning the stock will be destroyed, forcing him to eat crow and sell the stock.

If Johnson stays and the company continues the current path to doom, the company will be bankrupted by 2015, maybe sooner. There is a distinct possibility, considering the current trend of accounts payable, that suppliers will demand letters of credit this coming holiday season. If JCP cannot provide such letters, merchandise will stop being supplied to Ron and his company will collapse.

Disclosure: I am short JCP.

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