JC Penny — Short To Zero?

July 31, 2012

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Karl Denninger of Market Ticker is contemplating: JC Penny — Short To Zero?

Hmmm….

The company is claiming that it will be basically eliminating the traditional "checkout stand" model, using RFID tags and more of a "self-checkout" model.

Will it work? One wonders. Part of the drive to make this change is labor cost, but the claim is that this is really about what the customer wants.

I don't know about that.

One thing I do know — when I am shopping in a department store if you make it a pain in the butt for me to pay and go when I've made my selections, you run the risk of me abandoning the items and walking out without buying anything. But I'm a guy — and more gals than guys are the target market here.

This much is certain — the stock has lost about half of its value over the last six months and the firm is losing money. It currently sells over book value but at 0.3x sales.

If — and that's a big if — they can turn losses into profits — the stock is a screaming buy.

But quarterly revenue has been in the tank and the company has $800 million in cash against $3.1 billion in debt. Debt to equity is well into the "kaboom" range. Add to that a generally-soft consumer along with the cost of implementation of this strategy shift and you've mixed up a very nice jar full of nitroglycerin and started your juggling act.

With these facts and figures it's no surprise that 36% of the float is out short. The question is whether you should join those who are betting on this company being a zero.

High stress means you have to step up your game, and that's what JC Penny is attempting. "Break the glass" strategies are what's called for when you're in this sort of position, exactly as I called for Sprint to do by putting high-end phones on prepaid. They did it, they broke the model that everyone else was using, they're being rewarded and what looked like a bankruptcy candidate six months ago now looks like a turnaround story in-process, with bankruptcy off the table.

Can JCP do the same? I'm not sold. At the same time I'm skittish as hell shorting something that has 35% of the float out already — a nasty short-squeeze trap would be very easy to fall into. (Note that Sprint, as of a couple of weeks ago, only had 6% of the float short.)

My intuition says that the stock is a zero — but I'm not convinced enough to put money behind it. Unfortunately by the time I get to see an actual store "made over" it'll probably be apparent in the price whether they're going to survive or not.