J.C. Penney Bulls: You Won't Like This

The miserable second-quarter release put out by struggling retailer

this morning wasn't exactly a surprise, but the sheer size of the miss has bears licking their chops. J.C. Penney reported a loss of $2.16 per share, missing earnings estimates by over 103, while also missing on the top line by 3.6 percent. A piece of the report keeping the bulls from running for the doors was that the loss didn't exclude a $0.99 per share allowance loss, bringing the true adjusted number to a loss of $1.17 per share- a “mere” 10 percent miss. Following the report, shares were volatile to say the least, making a high of $14.40 and a low of $12.81, constituting a swing of almost 13 percent intra-day. Giving the stock some legs intra-day was a report from CNBC that Kyle Bass' Hayman Capital had a stake in J.C. Penney, but the street doesn't seem to know whether the stake was debt or equity, with the original rumor reporting that it was debt. Noted retail analyst Brian Sozzi commented that if the stake was indeed debt, it was most likely the junk rated paper yielding 11 percent, a key feature of which is that its ahead of common stock in liquidation preference. Hardly a gleaming endorsement of the company that some longs may have made it out to be. Sozzi currently has a Sell rating and a $12 price target on the stock, and remains bearish on J.C. Penney, saying it looks like Circuit City, Blockbuster, and Borders did right before the end. Supporting shares in the past has been the massive long from Bill Ackman's Pershing Square, but Sozzi made a special note to say what every long fears: Ackman could get out at any time. This leaves speculators to wonder what floor is there left if Ackman were to cut his losses and get out. He went on to note that while CFO Ken Hannah mentioned the company will not need to raise capital this year, it will almost surely need to do so in early 2014 with its current burn rate, and with so much of the company already mortgaged out, its likely that the capital raise will come from the equity markets. While the rumor of a Kyle Bass stake gave the stock a boost, the release stated foot traffic had fallen 5.5 percent, conversion rates had dropped 4.4 percent, while CFO Hannah even stated that he does not anticipate a huge trend change in the business. Adding to the bear case was some quant analysis from University of Michigan quant researcher Kai Petainen. In his breakdown he noted the negative momentum from this quarter is worrisome, while the company's historic trend of missing on earnings, with the median miss between Q4 2011 and Q2 2013 being a staggering $0.39. With the long case seemingly getting more and more shaky and shares going hyper volatile, the J.C. Penney leadership has to be sweating. Take into the account that there is no sign of a replacement for temporary CEO Mike Ullman, and the company's path to prosperity seems even more rocky. It's easy to kick a name like J.C. Penney while its down, but when the bull case is this weak, what's left? Shares of J.C. Penney rose 5.98 percent to $14.01 at the close on Tuesday.