Thursday, August 1, 2013

Store Intel: JCP and the Credit Crunch

Yesterdays news of CIT credit decision was not surprising in retrospect,only the timing of the announcement caught us all off guard. As the story was unfolding  it seems that the decision was one based on forward thinking. We would have to assume the results for the first six months  and more importantly, the last few months since Ron Johnson's departure were very disappointing. Our interpretation of CIT's decision is they might be willing to extend credit on future orders but only with a significant up charge on their normal financing  charges would they be willing to extend credit . We remember a very similar situation with Sears Holding where the CIT's of the world were asking for an additional percentage point or two in order to extend credit on orders placed by Sears due to their fragile financial condition. Our interpretation of CIT's decision's two fold. CIT might be over leveraged in JCP orders and feel based on their meetings this week with JCP management that CIT is unwilling to  work under their normal credit terms for JCP orders going forward. Thea second thought might be JCP operationally is in severe financial stress.  One of our sources felt that JCP, while they still has significant assets which will allow them to receive credit, do not have the funds to sustain their current trend of severe negative top line sales. One of our sources questioned whether JCP could continue to operate beyond the end of 2013. We at Retailsails, believe this school of thought to be the most likely scenario. For an investor what does this mean. A successful back to school season is critical to JCP survival. If their top line sales continue to hemorrhage from today through the middle of September, we anticipate that other credit agencies that are currently supporting JCP could potentially pull their line of credit for JCP. Ron Johnson's decisions are still have a tremendous negative effect of JCP. After ignoring their core customer for many months, they are not returning to shop JCP as hoped. Recapturing their customers is not an easy task. Their are too many choices. Our independent research has uncovered that the search for a new CEO to replace Myron Ullman has hit many roadblocks. We have heard JCP has approached 2 or more of their top choices and been turned down by all of these candidates. That is not a good sign. We have to remember that JCP before hiring Ron Johnson was not in great shape. Negative top line sales trends, lack of innovation and, let us not forget an Internet business that was trending negatively while the rest of the retailing community was showing double digit increases in Internet sales every month. We would have to think that JCP is hoping to get back to the "good old days" of bad business  with the return of Myron Ullman and his team. This decision by CIT yesterday would indicate that JCP has a long way to go just to " stop the bleeding". Our opinion on JCP is not in a good place and rate this company a 2 out of 10 until we see how they fare during back to school season.

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