JCP - JC Penney

[BG2008]

Luck,

 

I used to work as a real estate investment banker.  Back in 2008, my division at city tried to sell a portfolio of 3 regional malls totaling 3 million SQFT. The assets were located in central USA.  At the time, bids were coming back at about $80/sqft.  So, that's a real distressed valuation.  But JCP real estate is less valuable than mall real estate.  Anchors typically pay about $4/sqft.  This is the same for Macy's, Kohl, etc.  The inline stores generated $30-40  I would say that if the turnaround doesn't work, we're looking at about $/sqft at or below $80.  If you do the math on the owned real estate multiplied by $80/sqft.  We come to a valuation of roughly $4-5 bn.  With $3bn of debt, there's not that much left over for equity.  The problem with a liquidation is that the inventories will be sold at a loss.  Just look at the recent liquidation of Syms Group.  There are a lot of value lost in a retail liquidation.  Also, keep in ind that the leased space creates a liability as well.  IMHO, there really isn't a safe asset "downside protection".  The turnaround in the operation is paramount to equity having any sorts of value/recovery in a liquidation.  This is exactly the reason why I advocate the use of LEAPs to lock in a price and limiting downside to the premium paid for the LEAPs. 

 

Vornado tried to sell JCP stake. http://online.wsj.com/article/BT-CO-20130304-713650.html

[Martian]

Hi my name is premfan and i'm a retail turnaroundohlic. Repeat after me no more retail turnarounds!

 

I lost a little money on a turn around even though it was taken private..I succeeded in two turn  arounds. But not sure if it is related to skill. The lesson I learnt was, I need a bigger margin of safety and it should not be losing money..

 

So currently I'm looking at BODY, a women's apparel retailer  with a market cap of 123 million. It  crashed from $30 to $7.58 because they messed up last quarter and the CEO and Chief Merchandising officer sold tons of shares before it crashed. Now they both have resigned and a new team is in place. Others have purchased few shares in the last 6 months.

 

The company expects to bleed in the next half of the year. It has no debt, not losing money, and has 41 million and in cash i.e $2.53 per share (price $7.58). After few months if it improves its numbers, it may be back to mid teens.

 

any thoughts on this?

[PlanMaestro]

Excellent. Thanks BG.

 

Luck,

 

I used to work as a real estate investment banker.  Back in 2008, my division at city tried to sell a portfolio of 3 regional malls totaling 3 million SQFT. The assets were located in central USA.  At the time, bids were coming back at about $80/sqft.  So, that's a real distressed valuation.  But JCP real estate is less valuable than mall real estate.  Anchors typically pay about $4/sqft.  This is the same for Macy's, Kohl, etc.  The inline stores generated $30-40  I would say that if the turnaround doesn't work, we're looking at about $/sqft at or below $80.  If you do the math on the owned real estate multiplied by $80/sqft.  We come to a valuation of roughly $4-5 bn.  With $3bn of debt, there's not that much left over for equity.  The problem with a liquidation is that the inventories will be sold at a loss.  Just look at the recent liquidation of Syms Group.  There are a lot of value lost in a retail liquidation.  Also, keep in ind that the leased space creates a liability as well.  IMHO, there really isn't a safe asset "downside protection".  The turnaround in the operation is paramount to equity having any sorts of value/recovery in a liquidation.  This is exactly the reason why I advocate the use of LEAPs to lock in a price and limiting downside to the premium paid for the LEAPs. 

 

Vornado tried to sell JCP stake. http://online.wsj.com/article/BT-CO-20130304-713650.html

[ragnarisapirate]

Luck,

 

I used to work as a real estate investment banker.  Back in 2008, my division at city tried to sell a portfolio of 3 regional malls totaling 3 million SQFT. The assets were located in central USA.  At the time, bids were coming back at about $80/sqft.  So, that's a real distressed valuation.  But JCP real estate is less valuable than mall real estate.  Anchors typically pay about $4/sqft.  This is the same for Macy's, Kohl, etc.  The inline stores generated $30-40  I would say that if the turnaround doesn't work, we're looking at about $/sqft at or below $80.  If you do the math on the owned real estate multiplied by $80/sqft.  We come to a valuation of roughly $4-5 bn.  With $3bn of debt, there's not that much left over for equity.  The problem with a liquidation is that the inventories will be sold at a loss.  Just look at the recent liquidation of Syms Group.  There are a lot of value lost in a retail liquidation.  Also, keep in ind that the leased space creates a liability as well.  IMHO, there really isn't a safe asset "downside protection".  The turnaround in the operation is paramount to equity having any sorts of value/recovery in a liquidation.  This is exactly the reason why I advocate the use of LEAPs to lock in a price and limiting downside to the premium paid for the LEAPs. 

 

Vornado tried to sell JCP stake. http://online.wsj.com/article/BT-CO-20130304-713650.html

 

While a ton of value was destroyed with Syms, there is an argument to be made that there is a lot of value to come... It really just depends on what they can do... There are a ton of differences with the 2 though. JCP has a whole lot of RE, whereas Syms had under 2 dozen owned locations.

 

Interesting that Vornado was involved in both situations in some capacity, and didn't seem to do well in either.

[BG2008]

Rag,

 

I keep a spreadsheet for Syms.  From the asset sales that I've seen, they are coming in below the $100/sqft estimates that I have for the non-Manhattan assets.  It looks like the Manhattan RE is what's going to make or break whether equity gets any distribution.  I have been to that Syms store.  I don't think that parcel of land and building is really that desirable.  It's is quite a walk from the busier intersection where Brooks Brothers/Century 21 is located at.  It's one of those "blink" things that you pick up with real estate.  The building has no windows.  They basically have to knock it down and rebuild it to create value.  Unless that general area gets a big boost from the new Freedom towers.

 

From an investment perspective, I would hate to sit around and wait for all 20 assets to be liquidated and get over the a $150mm liability before I know I'll be paid.  Maybe my pessimism stems from the personal experience that I endured trying to sell non-trophy RE assets back in 08/09 and finding no buyers.  Another data point to consider, I know of a very smart investor who does these types of special situation/event driven investments.  He said that he was looking to short the stock when it rallied to $9 upon the bk filing.  Long story short, Syms is not a no-brainer to me.  I put it in the too hard to figure out bucket.  Also, I don't see how people wind up with a $15 distribution either to compensate for the too hard element. 

 

One of the advantage of JCP is that their fixed cost is rather small.  The rent and interest payments total less than $500mm.  In essence, that's less than 4% of sales assuming $13bn/year.  I'll bet that most retail turnarounds have 15-20% fixed cost and hence has little wiggle room for error. 

 

 

 

[Cardboard]

If Vornado is truly selling 10 million shares of JCP or roughly 40% of their stake as per reports out there, then it is scary. They know commercial real estate better than anyone and they have a market cap of over $15 billion. Why dumping 10 million shares for $165 million? Total stake is tiny relative to the company.

 

I have been looking at this thing for a while and one of the interest was the downside protection via the real estate. I have been hesitant since in a death spiral scenario, I would imagine that getting $10 a share left after all payments would be a good outcome. Now, if Vornado is getting out and not believing that they could liquidate that for more than $16, then it is saying a lot about the downside protection. It is also saying a lot about them not believing anymore in the turnaround possibility.

 

Cardboard

[texual]

Not to mention that Roth himself sits on the damn board of JCP. It is not like this is some passive stake. The guy knows more about JCP than we do, and he liquidates 10 million shares? In November he praised the turnaround, in late Feb he declines comment on the holding period, and in early march its already happened. Their loss reported at end of year was 300 million which to me is nothing to be happy about, but I figure if you talk about long term ownership and turnarounds, you'd stick to the investment until at the least, break even. They obviously see something is very wrong with JCP and getting out at that loss is perhaps better than the alternative.

 

I have no idea what the alternative is! I liked Ron Johnson, I liked his original strategy and believed he could work some kind of benefit to JCP shareholders. But after they cut the divident my spider sense began to creep up. It was just a matter of time before JCP would become a risky bet, and I think today, while cheap, JCP is a risky bet.

 

I'd still like to see what Roth has to say, or Ackman, or Johnson. Someone needs to speak up and inform investors what is going on behind the scenes.

[PlanMaestro]

One of the advantage of JCP is that their fixed cost is rather small.  The rent and interest payments total less than $500mm.  In essence, that's less than 4% of sales assuming $13bn/year.  I'll bet that most retail turnarounds have 15-20% fixed cost and hence has little wiggle room for error. 

 

+1

 

One of the few things I liked from the last numbers is that the burnt cash from operations was close to zero. Most of the cash pressure came from stores-within-the-store capex . They had working capital benefits, but still ... there is a runway to take 1 to 2 years of troubles, especially with a few well timed real estate sales.

 

Just two things.

 

(1) the store operation is somewhat fixed too. There are part-timers but if you push it too far, store sales will be compromised.

(2) 15-20% just in rents and leases expenses... there are not many of those. Maybe some fashion apparels that work with 50% gross margins in prime locations have those. No department stores.

[PlanMaestro]

Now, if Vornado is getting out and not believing that they could liquidate that for more than $16, then it is saying a lot about the downside protection. It is also saying a lot about them not believing anymore in the turnaround possibility.

 

The problem is that the real estate value and the turnaround are connected.

 

Maybe BG can add to this, but without a turnaround the combination of a decreased perception of the value of the real estate and being forced to sell is toxic.

[BargainValueHunter]

Hi my name is premfan and i'm a retail turnaroundohlic. Repeat after me no more retail turnarounds!

 

I lost a little money on a turn around even though it was taken private..I succeeded in two turn  arounds. But not sure if it is related to skill. The lesson I learnt was, I need a bigger margin of safety and it should not be losing money..

 

So currently I'm looking at BODY, a women's apparel retailer  with a market cap of 123 million. It  crashed from $30 to $7.58 because they messed up last quarter and the CEO and Chief Merchandising officer sold tons of shares before it crashed. Now they both have resigned and a new team is in place. Others have purchased few shares in the last 6 months.

 

The company expects to bleed in the next half of the year. It has no debt, not losing money, and has 41 million and in cash i.e $2.53 per share (price $7.58). After few months if it improves its numbers, it may be back to mid teens.

 

any thoughts on this?

 

Sounds a bit like Pier 1 Imports circa 2009.

 

That turned out...pretty good.

[BG2008]

Plan,

 

I am of the same opinion as you.  I look at a lot of names with owned real estate.  It's easier when they own a HQ and they can do a Sale leaseback.  Or if they own a couple NYC buildings that can be leased out.  JCP's real estate is worth $13bn if the turnaround is sucesful and they split the company into an OpCo and a PropCo ala Penn National Gaming.  I've been saying for a while now that without a business turnaround, there is no downside protection with the real estate for JCP.  This is the reason why I advocate the use of LEAPs rather than owning the equity outright.  Think about this logically.  The value of the real estate is only worth as much as a willing buyer in the market.  Using worst case scenarios, I can't imagine a RE buyer of that many JCP real estate.  I challenge people to ask the question, who will anyone buy the RE from JCP if the turnaround fails?  Macy's? Kohl's, Sears.  Anchor space is considered the most undesirable in a mall.  Many years ago, Steve and Barry started popping up everywhere.  Landlords thought Steve and Barry were the saviors that would save malls.  The truth is that Steve and Barry only generated cashflow from the large upfront tenant improvement dollars that landlords gave to them.  Sears is dying a slow death.  To have a view on JCP, I think you need to have an opinion of the turnaround or that Ron Johnson can be fired and they can go back to heavy promotions. 

 

I want to steer the conversation towards the next two quarters.  Why is the street so pessimistic about JCP outlooks and the cashburn so far.  Yes, their gross margins were terrible in Q4.  But, I suspect a good amount of that was due to their intent to clear out the old inventory and replenish it with inventory of the new shops.  If my math is right, when they have 40% of the space converted to shops by say May/June, the new shops will do 30% more in sales per sqft.  I'm assuming that the new shops can do 40% gross margin and the old sqft can do 27% gross margin.  Utilizing a BadCo/GoodCo framework. 

 

% of total SQFT 60% 40%

($ in bn) Badco GoodCo Total

Revenue $7.80 $6.76 $14.56

Gross 27% 40% 33%

Gross Profit $2.11 $2.70 $4.81

SG&A $4.35

EBITDAR $0.46

Rent $0.23

Interest $0.24

Pre-Tax Income ($0.00)

 

This is the breakeven analysis on a runrate-going forward basis.  Does this appear to be too much of a stretch? 

 

[PlanMaestro]

On your space absorption point BG, and I think it includes off-mall and internet.  (via @barbariancapital)

 

http://2.bp.blogspot.com/_1pb7adF2Rp0/Rx1Y8mnIdhI/AAAAAAAAAfQ/WlhRL7jx33k/s1600/Retail+Trade+Employment+as+Percent+of+Population.jpg

[ItsAValueTrap]

Yes, their gross margins were terrible in Q4.  But, I suspect a good amount of that was due to their intent to clear out the old inventory and replenish it with inventory of the new shops.

 

I'm not sure that old inventory is a good excuse.  All retailers have staff that try to predict how much inventory they will need in the future.  If they have too much inventory it means that somebody screwed up.  They are bad at retailing... this can probably be attributed to the new CEO.  There are a number of changes going on at JCP... less staff, less promotions, less private label, less advertising in the media, etc.  It's hard to say which of these factors have contributed to the decline in same store sales (especially because they don't test).  But to me, the overall picture is grim.  Ron Johnson has been running this company into the ground.

 

*No longer short JCP.  Maybe I will short it again, maybe I won't.

[luck]

my guess is roth agrees with your analysis bg.  otherwise, have no idea why he'd sell 40% of his stake at $16.40 or so.  needless to say, if this stock is at $10 or less, i will be hitting the mall every few days to try to observe what's happening with the new jcp.

[PlanMaestro]

http://jeffmatthewsisnotmakingthisup.blogspot.mx/2013/03/the-new-jcp-insider-sells-chumps-buy.html

[jrallen81]

Hi all,

 

Does anyone know if their partial return to a discount strategy extends to the new shop within shops merchandise? Are they segregating the discounts by whether or not the store has undergone a remodel?

 

 

[PlanMaestro]

Out come the knives.

 

J.C. Penney Former CEO Says Johnson Turnaround to Fail

http://www.bloomberg.com/news/2013-03-07/j-c-penney-former-ceo-says-johnson-turnaround-to-fail.html

[MYDemaray]

Will be interesting to see how Johnson handles this...not that he hasn't faced adversity before (I have no idea), but his career has been storied until now.  Nothing brings out one's mettle like a difficult situation.

 

On another note, does anyone think that JCP could simply reduce throttle on CAPEX, and reinstate discounts/coupons?  Yes, they would have to soothe suppliers who were promised things, but would that take terminal destruction off the table?  FWIW, my mother-in-law was a very loyal "Penney's" customer (not JCP), and she's done with them. 

 

Also, I did a site visit a few weeks back and showed some pics to my wife who is fashion conscious and has a masters in marketing  w/ expertise in product design.  Her reaction: yeah, basically looks like a department store.  Not quite wowed.

[PlanMaestro]

Will be interesting to see how Johnson handles this...not that he hasn't faced adversity before (I have no idea), but his career has been storied until now.  Nothing brings out one's mettle like a difficult situation.

 

On another note, does anyone think that JCP could simply reduce throttle on CAPEX, and reinstate discounts/coupons?  Yes, they would have to soothe suppliers who were promised things, but would that take terminal destruction off the table?  FWIW, my mother-in-law was a very loyal "Penney's" customer (not JCP), and she's done with them. 

 

Also, I did a site visit a few weeks back and showed some pics to my wife who is fashion conscious and has a masters in marketing  w/ expertise in product design.  Her reaction: yeah, basically looks like a department store.  Not quite wowed.

 

What's gone is gone. It will take too much time to get them back and would only stabilize things. Women's is make or break now, and they have to attract younger demographics. Joe Fresh this month.

 

And there is time to see the wheels turning and avoid surprises … like Ron Johnson getting fired. I might even buy American Apparel or Sears before.

[MYDemaray]

Will be interesting to see how Johnson handles this...not that he hasn't faced adversity before (I have no idea), but his career has been storied until now.  Nothing brings out one's mettle like a difficult situation.

 

On another note, does anyone think that JCP could simply reduce throttle on CAPEX, and reinstate discounts/coupons?  Yes, they would have to soothe suppliers who were promised things, but would that take terminal destruction off the table?  FWIW, my mother-in-law was a very loyal "Penney's" customer (not JCP), and she's done with them. 

 

Also, I did a site visit a few weeks back and showed some pics to my wife who is fashion conscious and has a masters in marketing  w/ expertise in product design.  Her reaction: yeah, basically looks like a department store.  Not quite wowed.

 

What's gone is gone. It will take too much time to get them back and would only stabilize things. Women's is make or break now, and they have to attract younger demographics. Joe Fresh this month.

 

And there is time to see the wheels turning and avoid surprises … like Ron Johnson getting fired. I might even buy American Apparel or Sears before.

 

No position here either.  Not even tempted. At this point it's too fun to be a bystander....just trying to muse on some scenarios

[ItsAValueTrap]

On another note, does anyone think that JCP could simply reduce throttle on CAPEX, and reinstate discounts/coupons?  Yes, they would have to soothe suppliers who were promised things, but would that take terminal destruction off the table?  FWIW, my mother-in-law was a very loyal "Penney's" customer (not JCP), and she's done with them. 

 

1- Listen to JCP's presentations.  Management is gungho about the transformation.  So is Ackman... look at Ackman's presentations and various media appearances.  And Ackman doesn't seem like the kind of guy who will reverse his opinion because he is wrong.  That's my read anyways.

 

2- JCP has fired a lot of people and this is a factor that could make going back slightly hard.  Even after they go back to their old ways, their competitors have advanced their business processes and have been improving their business.  Retailers are continually evolving and getting better (especially the Internet retailers)... the retail industry is about survival of the fittest and JCP may be left behind.

 

3- In general, the CEO plays a big role.  Mickey Drexler and the aforementioned Allen Questrom have had magic touches for the businesses they worked with.

 

I think for JCP to improve, it needs a new CEO.

[MYDemaray]

And Ackman doesn't seem like the kind of guy who will reverse his opinion because he is wrong. 

 

Uh yeah...did you read that new Vanity Fair article?

[texual]

Neither ackman or Ron Johnson are the right people to turn around the department store. However I'd be more interested in Lampert plus Ron Johnson at sears because Lampert is more involved and instead would force Johnson to be thrifty and focus on things that were longer term. Store within a store is easy compared to loyalty or membership programs. It can always be later when they put in stores within stores and bring up their store experiences but the immediate threat is the transition between traditional shoppers (their coupon sales buying generation) and their savvy younger audience who generally spend more on fewer products. They advertised the new jcp with young sexy models, even used Ellen which is great if your 22 to 30 years old and shop with uniqlo or h&m or forever 21. However their stores are not ready for that customer until they can prove themselves as appealing to those customers. Wen the older generation goes back to jcp their attitude is changed because their coupon buying ways are not going to shift. And the store appears to portray their marketing as a younger place to be shopping and that isn't what the store sells. And it doesn't inspire the customer who wants the message clean and simple

 

In that way I still believe sears did the right thing by having kept mainstream America as their customer base. They focus on middle class clients and really haven't gotten silly with marketing it as a young hip store. Layaway, coupons and sales still matter to shoppers and changing that message is hard to digest for the older customer and it isn't getting younger ones either. Is like a 15% drop happened twice, one from older custimers and from a lack of the ones you thought would show up but never did. This is the story of jcp in 2012 and will continue because they simply moved too fast and created a vortex. They are literally in no mans land right now!  But I do believe in the quote by Ron Johnson he day he made his presentation: I believe the #1 opportunity in retail is the department store.

[MYDemaray]

... which is great if your 22 to 30 years old and shop with uniqlo or h&m or forever 21. However their stores are not ready for that customer until they can prove themselves as appealing to those customers.

 

This is something I've thought about.  My wife would never consider JCP a destination over Anrthopologie, JCrew, H&M, Zara, etc....but my wife has the advantage of living in a major city where all of those are accessible.  If you look at JCP's footprint in our area, they are nowhere in the CBD -- they are all in the 'burbs.  Unless you live in a high-end burb, those boutique stores are inconvenient (save the internet).  In many ways, I think JCP has an interesting idea b/c they may have the geographic advantage of less competition with those higher end stores in their areas...and I don't think their price points are going to be wildly inaccessible (I mean -- I almost considered buying a puffy bright orange coat on clearance from JCP b/c it was $3! -- I didn't).

[Rabbitisrich]

As a very general rule, I try to avoid turnarounds that require gifted CEOs. Turnarounds that require competent CFOs, on the other hand, have been very fruitful.