J.C. Penney (NYSE:JCP) named Jill Soltau its new CEO, and its next move may be going private. Before JCP stock owners freak out, I’ll be upfront: I’m speculating a bit here. But there are a few reasons this might be on the horizon for JCP.
After all, Soltau comes to Penney’s from privately held Jo-Ann Stores, a fabric retailer owned by Leonard Green & Partners, a private equity firm specializing in retailers. Jo-Ann has been one of Green’s winners, like Petco, B.J.’s Wholesale Club and Whole Foods Market. But Green has also had some losers, like Sports Authority. Will they, or some other private equity company, be interested in a winning jockey on this nag?
It’s worth thinking about.
JCP: Infrastructure Without Sales
Hoover’s estimates Jo-Ann’s sales at almost $3 billion, with 23,000 employees and a good risk profile.
The risk profile of Penney’s is anything but. In its Aug. 4 earnings report, it reported $3.96 billion in long-term debt on assets of $8 billion. The quarter had depressed analysts — a 38 cent per share loss instead of a loss of 6 cents — and JCP stock is nearly worthless.
How worthless is it? Its market cap of $491 million is barely one-sixth of the recent quarter’s sales of $2.8 billion.
That market cap was 80% lower than it was when former CEO Marvin Ellison joined the company in August 2015. Ellison was a logistics guy, previously with Home Depot (NYSE:HD) and Target (NYSE:TGT), but he wasn’t a merchandiser, and he was thankful to escape to become CEO of Lowe’s (NYSE:LOW) in July.
The Right Jockey?
Soltau is a merchandiser. She made Jo-Ann the unquestioned leader of her category, knocking competitors like Hancock Fabrics out of the water. Before that, she was at Shopko, also privately-held, but she has also made stops at Sear’s, Kohl’s (NYSE:KSS) and Carson Pirie Scott in Chicago.
She knows fashion, she knows women … she is everything Ellison was not. The hope is she can use Ellison’s improved logistics to get women into Penney’s stores and make a profit.
JCP stock rose sharply on the news, but it has since given half that gain back.
What Is Penney’s?
Penney’s has been in almost continual crisis throughout the decade.
Under Mike Ullman, now chairman of Starbucks (NASDAQ:SBUX), it was a general merchandiser. Under Ron Johnson, who came from Apple (NASDAQ:AAPL), it was a mess. Under Ellison, it signed alliances with companies like Sephora but had no image of its own.
If Soltau can give Penney’s an image that women identify with, this stock could be a 10-bagger for investors.
Consider, sales at Kohl’s are only about 25% greater than those of Penney’s; Penney’s has the logistical capacity to grow to Kohl’s level and Kohl’s has a market cap of $12 billion, about two-thirds of its annual sales, while its most recent quarter showed $292 million in profit on revenue of $4.57 billion.
If Penney’s were worth two-thirds of its current sales, it would be worth over $8 billion. Of course, it might also have a quarterly net of $141 million, instead of the last quarter’s loss of $101 million.
To even begin that journey, Soltau must re-fill her C-suite. After all, most of Ellison’s top executives having departed after he announced he was leaving in May. Walter Loeb of Forbes called the company a disaster area when Ellison left, but he is hopeful about Soltau.
Care to Speculate on JCP Stock’s Future?
JCP stock was once a “widow’s and orphan’s” stock — a steady earner that paid a dividend for three decades. Then it lost its way: first to big box stores, then to specialty retailers and finally to the collapse of the middle-class mall and the rise of e-commerce.
If you’re to buy JCP stock now, you’re playing with money you can afford to lose. Understanding that your downside is limited, now may be the time to bet on Soltau. Even if she can’t turn the company completely around, she knows enough people in private equity to at least let you cash out.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.