JCP - JC Penney

[farnamstreet]

(Apologies if I missed the thread for JCP).

 

Here is William Ackman's Ira Sohn Presentation on JC Penney

 

http://av.r.ftdata.co.uk/files/2012/05/ira-sohn-pershing.pdf

[bathtime]

Thanks for sharing that. The new management team Ron Johnson has brought in is certainly impressive. I wouldn't bet against them. Here's a link to a PDF of the transcript from the latest CC:

 

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NDY3Mzg1fENoaWxkSUQ9NDk3MjcyfFR5cGU9MQ==&t=1

[PlanMaestro]

Good management meet bad industry. Bad industry meet good management. Enjoy.

[Olmsted]

I like Ackman, joined him in GGP just before bankruptcy.  Johnson seems smart.  So naturally, I looked at this stock after Ackman went activist.  The problem was that it was trading as if the turnaround had already occurred.  Now it's come down, but it's still a personality bet.  Without having any deep feel for this industry, this is tought to invest in.... wouldn't bet against them though.

[GaryCRibe]

Good management meet bad industry. Bad industry meet good management. Enjoy.

 

I have to say, I agree.  The prospect of cutting the fat is intriguing but I really think the secular headwinds are too strong. 

[bathtime]

Cribbed from Motley Fool (http://boards.fool.com/jcp-30057671.aspx?sort=whole):

 

---

3) There is an interesting piece in the Steve Jobs biography where they talk about setting up the Apple stores and Ron Johnson & Steve Jobs go to a Palo Alto mall one morning and walk around for a few hours talking about how the design and economics of a mall:

 

http://books.google.com/books?id=cf_2PBPP-rEC&pg=PT463&lpg=PT463&dq=%22eddie+bauer%22+jobs+%22apple+stores%22&source=bl&ots=pNJqmIYw5q&sig=P1pSStntvhZNzk3m70aoHliqFRY&hl=en&sa=X&ei=jjW9T5CVD7SI6AGbz6hI&sqi=2&ved=0CHsQ6AEwBQ#v=onepage&q=%22eddie%20bauer%22%20jobs%20%22apple%20stores%22&f=false

---

 

I'm not a seasoned investor in retail, but seems like they're attempting something radical at JCP. Don't know if it will work, but the mall within a mall concept has the potential to be executed in a unique way.

 

[Gopinath]

Mall within mall is a popular concept in India as this has been happening metro cities for last few years. This is because of the low inventory turn in branded clothing stores & higher occupancy costs if the store is stand alone compared to their revenue. They seem to be doing ok.

[DCG]

I'm not a seasoned investor in retail, but seems like they're attempting something radical at JCP. Don't know if it will work, but the mall within a mall concept has the potential to be executed in a unique way.

 

I'm curious about it. When I go into a department store like this, it's generally to look at a specific type of clothing. If I'm looking for a pair of shorts, I'd rather have all the shorts by various brands in one place, rather than have to check 25 different sections divided up by brand. My local Macy's is mostly set up this way and I find that it can be a frustrating way to shop at times.

[Guest valueInv]

I'm not a seasoned investor in retail, but seems like they're attempting something radical at JCP. Don't know if it will work, but the mall within a mall concept has the potential to be executed in a unique way.

 

I'm curious about it. When I go into a department store like this, it's generally to look at a specific type of clothing. If I'm looking for a pair of shorts, I'd rather have all the shorts by various brands in one place, rather than have to check 25 different sections divided up by brand. My local Macy's is mostly set up this way and I find that it can be a frustrating way to shop at times.

I doubt women shop that way. For a store like JCP, I'm guessing women drive a significantly higher portion of sales.

[TheEnterprisingInvestor]

So when I look at this, I find it intriguing, but mostly concerning.  One the one hand, they're doing something kind of radical and trying to cut cost.  On the other hand, they're alienating and confusing their current customers with a strategy that may not bring in new ones.  If they can somehow pull it off it will work wonderfully for shareholders.  If not, the company crashes and burns.  Personally, and I don't have a horse in this race, I doubt they can do it and view this whole thing as something of a death knell. 

 

I'm also not sure I buy the jockey argument.  Don't iPods, iPhones, and iPads sell themselves? 

 

FWIW, I thought the cost cutting part of the presentation was most compelling, and a great start.  I just think they're going to drive their customers away along with it. 

[Myth465]

http://www.google.com.hk/url?sa=t&rct=j&q=howard+retail+jcpenney+yahoo+finance&source=web&cd=4&ved=0CGQQFjAD&url=http%3A%2F%2Ffinance.yahoo.com%2Fblogs%2Fdaily-ticker%2Fj-c-penney-sears-ron-johnson-done-incalculable-160736591.html&ei=dBu_T5TEE6Wf6AHJifCtCg&usg=AFQjCNEv6tNdASSi94-DW6WkKOU5Z4QOGw

 

Howard Davidowitz made the same point here.

[ragu]

For a store like JCP, I'm guessing women drive a significantly higher portion of sales.

 

And you'd be guessing right too, valueInv. From page 5 of the presentation linked in the OP:

 

Women's apparel + Women's accessories + Home + Children's = 64% of JCP's sales.

 

And on page 26, under Observations from the Promotional Pricing Strategy: "She knows the right price:" (emphasis supplied)

 

Seems pretty clear who they ought to be and indeed, who they are, targeting.

 

Best,

Ragu

 

[bathtime]

http://www.google.com.hk/url?sa=t&rct=j&q=howard+retail+jcpenney+yahoo+finance&source=web&cd=4&ved=0CGQQFjAD&url=http%3A%2F%2Ffinance.yahoo.com%2Fblogs%2Fdaily-ticker%2Fj-c-penney-sears-ron-johnson-done-incalculable-160736591.html&ei=dBu_T5TEE6Wf6AHJifCtCg&usg=AFQjCNEv6tNdASSi94-DW6WkKOU5Z4QOGw

 

Howard Davidowitz made the same point here.

 

Great video, I like him. Thanks.

[TheEnterprisingInvestor]

http://www.google.com.hk/url?sa=t&rct=j&q=howard+retail+jcpenney+yahoo+finance&source=web&cd=4&ved=0CGQQFjAD&url=http%3A%2F%2Ffinance.yahoo.com%2Fblogs%2Fdaily-ticker%2Fj-c-penney-sears-ron-johnson-done-incalculable-160736591.html&ei=dBu_T5TEE6Wf6AHJifCtCg&usg=AFQjCNEv6tNdASSi94-DW6WkKOU5Z4QOGw

 

Howard Davidowitz made the same point here.

 

Glad to see I'm not alone on this. 

[prevalou]

The difference is: Ron Johnson is a true retailer while Davidowitz is an expert, a consultant.

Interesting what he said In 2009: the worst is yet to come: if you are not petrified you are not paying attention.

[merkhet]

http://ir.jcpenney.com/phoenix.zhtml?c=70528&p=irol-newsCompanyArticle&ID=1706175&highlight=

 

Looks like Francis is out at J.C. Penney...

[slkiel]

Do we have a per share value of their real estate out there? That was the reason for Steven Roth being involved. I thought I had seen a $30 per share number out there. With the cost cuts and real estate value out there, there should be a floor much higher than today's price.

[accutronman]

Do we have a per share value of their real estate out there? That was the reason for Steven Roth being involved. I thought I had seen a $30 per share number out there. With the cost cuts and real estate value out there, there should be a floor much higher than today's price.

 

The only thing I could find is the following:

 

Bill Ackman -- whose fund, Pershing Square Capital, owns 26% of J.C. Penney -- claims the replacement value of the retailer's real estate is $11 billion. Since the enterprise value of J.C. Penney is around $7.5 billion, in theory shareholders come out ahead in a liquidation. This is where having Steve Roth and Vornado (NYS: VNO)  on the board comes in handy

[JRH]

Getting pretty intrigued at these prices.

 

I understand the "poor business" concept, and do not disagree that retail is tough.  I've never bought a retailer on the idea that they would simply out-maneuver their peers.  There needs to be a structural advantage.  I think that the pricing snafu that gets all the press is a sideshow to the real story, per both Johnson and Ackman's presentations.

 

JC Penney is going into the business of competing with malls.  As Ackman mentions in his Ira Sohn presentation, with their real estate, their own cost per square foot is a fraction of the average mall.  In theory, they can offer attractive rent prices and pocket a significant premium.  They can also cut out a lot of the business support costs for their tenants by offering the infrastructure for checkout and, later, distribution/logistics.

 

Hard to say what happens in the longer term, since none of that (besides the low-cost real estate) is really a sustainable competitive advantage.  You could bet on tremendous execution and even them building JC Penney into "America's Favorite Store", per Ron Johnson's presentation, but I think treating that as anything except an extra upside risk is foolish.

 

I wouldn't buy as a bet on Ron Johnson, but I do believe he is extremely competent and will work hard.  That doesn't guarantee anything but I believe he will admit real mistakes when they are made.  In other words, he has me sold that their general strategy is still compelling.

 

Always interested in other opinions!  Thanks in advance.

[Cardboard]

The 15 bagger potential according to Ackman yesterday is certainly an eye popper!

 

I was looking at that thing in the $30 range late last year and could not figure out the attraction other than for Johnson turning things around significantly. On that one, I am wondering if this is not a repeat of GE managers in the early 2000's moving to other companies with the promise of implementing GE's breakthrough managerial techniques. Apple is currently the king in town and any top manager coming out of there could be seen as some genius. Maybe that Johnson is truly superior, but I don't know for sure. This is selling general merchandise and not trendy high tech gadgets. What I like however is that he put down $50 million of his own money in a warrant exercisable in the high $20's.

 

The yield at current price is also very attractive at 4% and it is now trading right around book value which looks quite solid considering their real estate holdings. The problem with the real estate is that it can't be counted into our valuation like net cash. It is used in the on-going operation. Maybe that Ackman and Vornado will find a way to split the company into two with a REIT, but I am not sure what is the benefit for JCP since leasing their stores from the REIT would add to their leasing costs (the majority of their stores are still leased). And to honor the lease, you need to make money and hopefully a profit and it is not the case now.

 

It kind of looks like Sears #2. At least, Ackman has already employed what looks like a competent retail man to run the show instead of interfering with the on-going business. Although IMO, for the stock price to move up a lot, you will need to see improved operating results and not some sort of financial engineering. Hence the importance of Johnson. The issue here is your downside protection and when do they pull the plug if the turnaround fails to sell the real estate? 5 years from now? What will be the value of the real estate then combined with potentially large accummulated earning losses?

 

Cardboard

[gfp]

"The yield at current price is also very attractive at 4%"

 

No yield, no dividend anymore.

[bathtime]

Prior to Apple, Johnson was VP of Merchandising at Target, so he does have a successful record in clothing retail.

 

http://management.fortune.cnn.com/2012/03/07/jc-penney-ron-johnson/

[JRH]

Personally, I put no value in a liquidation scenario and would not rely on it in any circumstances for an investment thesis in JCP.  It is only in very specific situations where a liquidation can be counted on to take place before substantial and ongoing damage takes place as a business' management attempts (and, history shows, usually flounders) to turn it around.  Certainly, the presence of Ackman on the board makes that scenario MORE likely if things go downhill, but I still think it is too uncertain to bank on in any reasonable way.

 

There could be financial engineering (leveraging up the real estate for buybacks/dividends), but they would essentially be liquidating their competitive advantage to their shareholders.

[txlaw]

It kind of looks like Sears #2. At least, Ackman has already employed what looks like a competent retail man to run the show instead of interfering with the on-going business. Although IMO, for the stock price to move up a lot, you will need to see improved operating results and not some sort of financial engineering. Hence the importance of Johnson. The issue here is your downside protection and when do they pull the plug if the turnaround fails to sell the real estate? 5 years from now? What will be the value of the real estate then combined with potentially large accummulated earning losses?

 

Cardboard, I think you hit the nail right on the head.  JCP is Ackman's version of Sears, except that JCP does not have the same level of intangible IP as Sears (KCD) and is less financially engineered. 

 

Ackman's statement about a potential 15 bagger is very intriguing but, of course, super optimistic.  I suppose if JCP starts churning out sales per square foot on the level of specialty stores and increases its footprint, the 15-bagger scenario is a possibility, as operating leverage could be stupendous.  Clearly, that's what Ron Johnson is going for -- he is trying to actually revolutionize mall retailing by successfully implementing the store within a store concept in a way that will draw shoppers despite the increasing shift to online sales.  If anyone can do that, Ron Johnson is the guy, although maybe he cannot be successful in this environment.

 

As for a liquidation scenario for JCP, as with SHLD, I would suggest that the downside case should more appropriately be labeled a runoff scenario, where stores are squeezed for every last bit of cash, leases are sold back to malls (who would pay JCP to replace them with a successful anchor tenant that drives traffic and, therefore, generates more profit), and owned real estate is sold off. 

 

I have been watching and am considering taking a small position in JCP.

[DCG]

I wouldn't buy as a bet on Ron Johnson, but I do believe he is extremely competent and will work hard.  That doesn't guarantee anything but I believe he will admit real mistakes when they are made.  In other words, he has me sold that their general strategy is still compelling.

 

 

I'm sort of the opposite. I want to put my money behind Ron Johnson, but don't have a ton of faith of the economics of the business.

 

-And i've never been a fan of using liquidation value of the real estate as a good way to value a company. Liquidation values are pretty much always greatly overstated. I read just a couple weeks ago that REITS and other owners of large box-store properties are having a real hard time selling them and even renting them. Companies are looking for smaller retail spaces, not larger. What new large department stores are popping up that would buy a lot of box-store properties in malls (I've made this same argument with Sears and KMart for a while)?

 

That said, I've been keeping a close eye on JCP recently.

 

-Has anyone been in a JC Penny where they've rolled out their new floor model?