To bring JCP back to the same financial level as before RJ, it has to raise in equity about 70% of the total cost of store upgrades and cumulative losses. That's a part of Phase 3 that Ullman neglected to mention in the Q4 CC.
There will definitely be another equity offering. The offering could be announced with the stock as low as $9, which would mean the stock would be sold at about $8.20, and the price would meander around that level for a couple weeks.
But once investors realized that it will then be clear sailing ahead, the stock should move toward $15 or $20. Proceeds will be used to retire debt, which will provide an immediate reduction in operating costs and accelerate progress toward break even.
The JCP debt to equity ratio has been pushed up to a historically high level. That dramatically reduces its ability to withstand fluctuations in the business. The reason RJ didn't sink the company is that JCP has historically been in sound financial condition, but that's now changed. In order to regain the financial stability JCP desires, it will have to raise additional equity.
I'm long, and will continue to be long. But to think that this stock is heading up in a straight line is foolish. There will be an equity sale because JCP debt is simply too great for the long term. The Ukrainian situation is likely to worsen this week, and that will also push the market down.
Although I'm happy about the rise, I know that today JCP has moved one step closer to a stock offering. My expectation is that they will try to keep the stock price from dropping below $9, so will announce the equity offering as soon as the price gets closer to $10.
I certainly agree that the fact that Russia is willing to engage in this land grab, after signing an agreement giving Ukraine assurances as to its territorial integrity in exchange for giving up nuclear weapons on its soil, is destabilizing to the world order. At the very least, Iran will use this as proof that they require nuclear weapons. Japan may also choose to achieve a nuclear capability. Distrust among nations will result in fewer profit opportunities for international companies.
I agree with virtually every post on this thread. There's a market correction looming, but the bull market is likely to continue.
The greatest threat to the JCP stock price is the upcoming stock offering. The balance sheet remains challenged and JCP would be wise to use the first available opportunity to sell additional stock. Doing so would further reduce the chance of a liquidity problem, which is good for all longs. The longer it waits, the more risk that a market pullback will interfere, so I think the stock offering will come before mid May.
At the time of the stock offering, the stock price will suddenly drop by about $0.50 to $1. That's primarily because it's necessary to provide an incentive to investors to rapidly add about 100 million new shares. But after the SO, the price will quickly recover. In fact, that's when I would expect a short squeeze to occur.
Libo, firstly let me say that I'm still long and have never sold even one share.
I was prepared for a bad result from Q4. However, as I posted one day before the release, I realized that the pension expense and income tax asset were able to affect earnings by up to $1.50. As it turned out, the two together added about $1.35 to earnings, which was at the far end of what I thought possible.
At Markit's request, I made an earnings estimate about two weeks before the release. My estimate of operating earnings was a loss of between ($0.70) and ($0.80). It turned out to be a loss of ($0.76); however, I had sales too high, and SG&A too low. So I was right only because I made two offsetting mistakes.
Since the release I've been trying to figure out where the SG&A expense went. I haven't yet figured out why it was much lower than expected, so I've become concerned that JCP really pushed the accounting envelope in every way they could. Costs don't simply disappear, but can be hidden for a time.
After all is said and done, the most important number is sales, and they were, simply put, disappointing. If sales don't begin to rise fairly dramatically, it's going to be a very long recovery. Their estimate of mid single digits is at the low end of what I believe is necessary to get things right.
Lastly, my take on Sadove is that he's absolutely not interested in the CEO position. That wouldn't be the case if things were going well.
Success in retailing is derived from the ability to paint an enticing image to attract shoppers, and more importantly, buyers. Ullman isn't going to turn that aspect of his personality off simply because he's dealing with stockholders. In the final analysis, he's always selling something.
Virtually all people are capable of deception, but individual limits vary widely. Ullman may be willing to push the envelope farther than most, but identifying the truth is part of due diligence. I have to laugh when people complain that Ullman deceived them regarding the last stock offering. An investor would have to be a complete idiot to not see that coming.
And just to be perfectly clear, there's another stock offering on its way.
Sadove's convincing statement that he's not willing to take the CEO position confirms that the recovery is going to take longer and be more challenging than many had thought. Keep in mind that if the prospects for JCP brighten, he could miraculously change his mind.
This is a good post. Every company has both a bull and a bear case, and for JCP both are quite convincing.
My takeaway from the Q4 results is that the company trajectory going forward is at a lesser slope than I had previously thought. JCP will still survive and the stock will go up, but not as fast as it may have. Generally bullish news prevails, and that will boost the stock and enable another stock offering, which is virtually assured because it's necessary to strengthen the balance sheet. Given the current situation, I expect the SO to happen when the stock reaches $10. At that time it will pull back to around $9, then continue upward to $15.
Make no mistake that JCP management is continually trying to manipulate expectations, and in that way manipulate the stock price. But every company does the same thing.
Retay, you're the last one I would have expected to point out misuse of a word. You've made great progress. Going forward; however, we would all be happy if we could cure you of the inclination to make up your own punctuation rules.
A substantial investment (4.9%) in JCP is more likely than a takeover. With a takeover, Buffett would lose the loss carry forward benefit and place himself in the middle of a controversy surrounding the forward prospects of brick and mortar retailers.
The economy continues to have too much excess productive capacity to force inflation up, and interest rates will never rise when inflation is so low. So increasing interest rates will not trip a fall in the stock market.
It would be better if you spend less time sharing your meal experiences and more time providing a cogent explanation for your opinions. I agree we are far into a bull market that's being propped up by the Fed. Should the Fed suddenly withdraw support, the fall would be fast and furious. But there's really no reason to expect the Fed to withdraw, simply because the negative effects of the headwind from a negative current account will keep them in the game.