Investment Opinion: To reassure investors that the business has stabilized and that a year-end liquidity projection in excess of $2bn, and more importantly a projected low for the year in excess of $1bn will be attained, J.C. Penney Company, Inc. (NYSE:JCP) will have to achieve its projected 3%-5% sales gain for 1Q/14.

4Q/13’s P&L contained a $270mm tax credit ($0.88 per share), attributed to pension adjustments, that swung the bottom line from a pretax loss to a profit of $35mm.

 

The 4Q/13 credit caused us to wonder if a benefit was also derived above the pretax line, such as perhaps a credit that contributed to a 17% reduction in expenses. If so, it would have had implications for projecting expenses going forward. Based on input we received from former J.C. Penney Company, Inc. (NYSE:JCP) personnel it appears that reserves no longer required to pay big pensions were likely booked as a credit to shareholders’ equity.

J.C. Penney Company, Inc. JCP

J.C. Penney Company, Inc. JCP

J.C. Penney Company, Inc. JCP

J.C. Penney Company, Inc. JCP

The credit was due to layoffs of thousands of people, many with 20 years of service or more, many higher paid execs. Terminated employees, over age 50 but not yet 55 years old when they would have qualified for comfortable pensions, left with meager pension prospects.

With fewer people on the payroll and newer employees covered by less generous plans than had been in place years ago, annual pension expenses will be much lower in the future.

Since J.C. Penney Company, Inc. (NYSE:JCP)’s pension plan is fully funded, if pension investment results are favorable, there should be credits to income.

 

Accounting regulations prevent JCP from obtaining the benefit of NOL tax credits until after it reports about two consecutive quarters of pretax profits. Since profits seem unlikely for the next year or two, except during fourth quarters, a NOL tax benefit seems relatively far off.

Our quest for an explanation of the pension credit was intended to determine if the decrease in 1Q/14 expenses might be anywhere close to the 17% in 4Q/13. The answer is no: management says that while expenses might be below that of a year ago, the decrease is likely to be less than 5%.