JCP - Valens Credit Report - 2018 05 16
Credit markets are grossly overstating credit risk, with a CDS of 967bps relative to an Intrinsic CDS of 401bps, and a cash bond YTW of 13.127% relative to an Intrinsic YTW of 6.957%. Furthermore, Moody's is materially overstating JCP's fundamental credit risk, viewing the firm as a highly speculative, high-yield credit, with its B3 rating six notches lower than Valens' XO (Baa3) rating Incentives Dictate Behavior™ analysis highlights that JCP's management compensation framework should incentivize them to improve margins and grow revenue over time, which may lead to greater cash flows available for servicing debt. Also, with low change-in-control compensation, management is not incentivized to pursue a sale or accept a buyout of the business, limiting event risk Earnings Call Forensics™ of the firm's Q4 2017 earnings call (3/2) highlights that management is confident in their planned product launches and brand expansions for Sephora in 2018, and that their Jewelry business is strong online as their assortment meets different customer needs. Additionally, they are confident that their speed calendar allows their merchants to make decisions closer to the time that merchandise has to be on the floor -JCP is trading at a 0.9x UAFRS-based P/B, which is low relative to historical valuations. However, equity markets appear to be pricing in the best-case scenario for operational turnaround, likely limiting equity upside from operational improvement. That said, because JCP trades at a discount relative to its asset values, credit driven equity upside may be warranted
J. C. Penney Company is a holding company whose principal operating subsidiary is J. C. Penney Corporation, Inc. The company's business consists of selling merchandise and services to consumers through its department stores and its website at jcpenney.com. The company's department stores and website serve the same type of customers, its website provides the same mix of merchandise as its store assortment along with other extended categories that are not provided in store, and its department stores accept returns from sales made in stores and via its website. The company sells family apparel and footwear, accessories, jewelry, beauty products through Sephora inside JCPenney, and home furnishings.
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