JCP - JC Penney

[AchilliesValue]

To those saying Lambert should hire Johnson I highly doubt that's gonna happen. SHLD is burning cash at the moment and while I think they might be cash positive this year you can be sure that cash will be put to buying back shares and not being spend on some big transformation.

 

Ultimately I think that's why Johnson failed. He didn't have the financial resources to go through this transformation on a complete scale yet he cut the sales and such at every location like the transformation was nationwide. I think his ideas were brilliant and I'd love to see another retailer in a better financial position use his brain and implement this strategy. Also would've been curious to see how this would have played out since I think he learned a lot from his first year mistakes and had a chance of righting the ship but I guess we'll never know.

[jay21]

lampert's an excellent capital allocator, but i don't know about department store retail management.  yeah, i agree, johnson would be an improvement, especially after learning from all the mistakes at jcp.  that said, there's probably somebody out there better than either ullman or johnson.

 

as for ackman, not sure what to make of him at this point.  after his involvement in borders and jcp so far, i think retail may not be his forte.  he's done a fabulous job with hhc though.  i have a 7% position in hhc and have been following it since the spinoff.  making the right moves on the south street seaport, in hawaii, etc.

 

His involvement with GGP was very smart.  This was a case where I believe the thesis was if the turnaround works I make 5 to 10x.  If it fails, the real estate assets provide good liquidation value.

[BargainValueHunter]

JCP JAN15 $8 puts ~$1.75

[tooskinneejs]

Thing is... JCP was only interesting w/ Ron Johnson and his ideas... otherwise, it's just another also-ran retailer.

 

Those are my thoughts exactly.  Johnson's plan had the potential to transform the company and make it relevant into the future for a new class of consumers.  It was uncertain whether it would work, but at least he was trying to improve things.  Getting rid of him was a big mistake in my opinion.  If they go back to their old couponing ways and traditional product lines, and draw back their older, miserly customers, they will slowly die over time.  It's inevitable.

 

I never got close to pulling the trigger on this one because I didn't think the price was anywhere near attractive and I hadn't yet seen them turn the corner on their revamp process.  Now, even if the price becomes more attractive on an absolute basis (not relative to a nearly impossible to estimate intrinsic value at this point), I'm not sure this isn't a dead end anyway.

[DCG]

When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.

[hyten1]

DCG that is definitely true

 

however i don't think it quite applies here 100% (maybe 50%)

 

ron johnson made quite a few mistakes and big one at that, especially when he didn't test his new strategy and roll out the plans slowly by testing first by figurely out what worked and what didn't before rolling it out system wide.

 

there are quite a few very successful companies and business in this industry

 

hy

[BG2008]

This is one of the names that I've done a lot of work between the stores visits and story tracking.  The initial thesis was that

 

1) If they turn, likely a multi-bagger

2) If they don't turn, likely an ugly outcome

 

Regarding the reputation and the management quote.  I've thought that one through multiple times.  However, I would make an argument that they were doing things that were fundamentally different by transforming the dept retail business.  One can perhaps makes an argument that the shop within a shop strategy was more of a mall business except that you share in the P&L of the retailer.  To a certain extent owning mall real estate is a bit like being an airplane lessor.  Airlines go bankrupt, but you get to extract a decent return on your capital while being funded at a low cost.  In the mall biz, your retailers may go bankrupt, but the malls will just rotate out the retailers and is guaranteed a cut of the rent (assuming you're the dominant mall).  With the inflow of vendors, JCP was like a mall owner that was integrated (it shared in the P&L of the retailing).  I think JCP needed someone like Ron Johnson and his hubris/guts to say "Slow death or let's make a run at it." 

 

By being in the stores lately, it's apparent to me that Q1 of 2012 will be brutal because 1/5 to 1/3 of their space was largely out of commission.  I think they may lose another $200-500mm in operating losses in Q1.  Factoring in the $600-800mm in Capex needed to get to 40% of the SQFT converted.  There could be a $1bn cash draw in 1H 2013 alone.  I'll bet that's really scary from Ackman's seat.  But, I thought that everyone involved will have enough patience to wait and see how Q2 looks when it is truly on a run-rate of 40% new and 60% old.  A couple observations, Marchesa was a successful launch.  Joe Fresh was underwhelming and Cosabella, Duro were duds in my opinion.  They pumped a lot of advertising dollars into Joe Fresh and I really don't see anyone shopping in that section despite the 3,000-4,000 SQFT of space devote to Joe Fresh.  I suspect that those who has access to the weekly $/SQFT reports probably saw underwhelming performance in the new shops. 

 

Without a doubt, the experience and product offering at JCP under Ron's reign were a significant improvement.  At this point, I'd say wait and see how they implement the new shops strategy.  I guess a discount dept store with pockets of "shops" can still work.  It would be really ironic if Ullman came back and bought back coupons/sales and turn the company into cashflow neutral/positive and simultaneously the shops starts to get traction as people find out about "new brands at JCP".  Then people may say Ullman is the savior, when it was Johnson's planting of the tree that allowed people to sit in the shade.  (This is likely the best case scenario, I don't see Ullman leading us to a 100% buildout of shops). 

 

I guess from this point, I would wait till how Q2 plays out before exiting the position.

 

 

 

 

 

[PlanMaestro]

Joe Fresh was underwhelming and Cosabella, Duro were duds in my opinion.  They pumped a lot of advertising dollars into Joe Fresh and I really don't see anyone shopping in that section despite the 3,000-4,000 SQFT of space devote to Joe Fresh.  I suspect that those who has access to the weekly $/SQFT reports probably saw underwhelming performance in the new shops. 

 

That's the same impression I got from pictures and observations across the country from a friend. Underwhelming considering the investment and the privileged real estate.

 

We also visited Joe Fresh's Fifth Avenue store. Not what I expected in terms of product, traffic, conversion and demographics. It's hard not to conclude that Joe Fresh is an unknown brand and needs lots of time.

 

As I said before, Joe Fresh was make or break. The balance sheet could not sustain more swinging for the fences only catching air.

 

At this point, I'd say wait and see how they implement the new shops strategy.  I guess a discount dept store with pockets of "shops" can still work.

 

Only slower, with more testing, and without the screaming upside. Better than trying to go back though.

 

Then people may say Ullman is the savior, when it was Johnson's planting of the tree that allowed people to sit in the shade.  (This is likely the best case scenario, I don't see Ullman leading us to a 100% buildout of shops). 

And Ullman may have been saying that all that was working was his: Sephora and Mango. A retailer is as good as his last hit.

[texual]

Without Johnson the entire thing is dead to me. Thank god I never purchased a share but I've studied the hell out of jcp for over five years and think they are now doomed. It will likely go into bankruptcy or get taken out at low valuation by private equity. It couldn't survive without completing the journey they began a year ago. You can't just walk away from that!

 

I still think this is some kind of late April fools joke. Is this some art of Ron Johnson's being put to use? Will he rise again seven days later? Will Ellen degeneres be the next chairman or something? This is nuts. I'm in total shock. I can't even accept that they chose this path. Morons.

 

Boards of ill repute need to be flushed out. I think there were three board room coups widely regarded as bad choices. Starting with Steve jobs getting fired and apparently mark Hurd if you ask Larry Ellison but the third will be ridding jcp of Ron Johnson a year into his transformation.

 

 

[Palantir]

Hey wouldn't it be funny if JC Penney totally exited the game and turned into a shopping REIT. Trippy.

[BG2008]

The whole shopping REIT concept is a bit bizarre for me.  These are anchor space and not inline space.  It's like saying "I've got an awesome piece of Fifth Ave land and it can be turned into a gleaming office tower."  The truth is that you need to put up a building.  No vendor in their right mind will rent space in JCP when it's really just a really big box. 

 

Someone on VIC had mentioned that when looking to invest in turn arounds, invest in situations where a good CFO can bring a company back to profitability and avoid those where you need a brilliant CEO. 

 

Plan, I agree with you that Joe Fresh was a bell weather for the name.  I waited eagerly for March 15th like a kid waiting for X-Mas.  I was quite disappointed when they unveiled. 

[texual]

My assumption was after they converted enough square footage, maybe 40 or 50%, and the stores can more easily convert the remaining over time, the new stuff picks up traffic. At least I saw that most of the nicer JCP stores were so heavily under renovation, maybe 30% of the store was completely boarded up.

 

That explains low traffic better than customers not liking shiny new crap. JCP was doing fine, under the boards and walled off areas, they just didn't generate any money during that time. Sucks for Ron Johnson who is most likely too smart to be stuck at a company with such middle-of-the-road talent and board members who cannot imagine anything special. I'm ashamed of American business after this episode. The entrepreneurial spirit is gone, we just witnessed a great imagination get kicked to the curb by whom? A hedge fund manager who controls the stock? Board members like Roth? Well done, America.

 

We're really middle-of-the-road. Maybe Johnson can get hitched to a new retail concept from birth like Apple, and re-ignite his imagination and make everyone turn their heads. What a shame.

[BG2008]

Texual,

 

I agree that the initial 40% was likely the hardest and yes there were 30% of the SQFT being boarded and that certainly did affected sales/traffic etc.  My entire long thesis rest on the goodco/badco transformation.  As the shops get put in and the old SQFT gets taken out, I was modeling a 30% increase in sales and a 40% gross margin leading to low/mid teens operating margin for the new square footage.  I have to admit that the visual estimates of $/SQFT of Joe Fresh, Cosmopolitan, heavy discounting of Izods during X-mas, Cosabella, Duro (total failure IMO), etc did not lead me to become comfortable with the 30% increase in sales the new operating margin.  I also found it disappointing on the Q4 call, some of the analysts kept asking how the shops performed and Ron Johnson and company were mum about sharing $/sqft when they touted those figures 1-2 quarters earlier. 

 

I guess what I am saying is that if we all had a weekly cash projection like the board, Ackman and Roth, mabye we won't be so thrilled about keeping Ron Johnson on.  If a 6 months cashflow projection clearly indicates that they can't fund inventory for 2013 X-mas at the current burn rate, that would be problematic.  This leads me to question how bad is the cash burn at JCP?  Not having Ron Johnson certainly kills the 10x possibility. 

 

I certainly agree that once they have 40% of the SQFT converted, it becomes very easy to attract new vendors if the existing vendors are doing well.  Using a mall comparison, no one wants to rent from mall when it's a collection of Chinese buffets, dollar stores, and fly by night operations.  But if the mall has 40-50% national retailers like BR, Gap, Abercrombie, etc, it would be very compelling for new tenants given that JCP essentially charges no rent. 

 

Does anyone know of any other turn around situations that rest on a CFO cutting cost rather than a brilliant CEO changing the strategy.  An example would be the IDT Corp situation back in 2010.  The key was the former CEO coming back and firing people and then spinning off assets. 

 

[texual]

And you would be completely right. I thought the same thing. I just forgot for a brief moment we had owner's who were spineless. Ackman is officially the worst public hedge fund manager who gets a lot of attention for no reason. He is neither value, long term, imaginative, or anything. The hardest part would be the initial surge of closed off space, and culminating in Martha Stewart shops being huge draws, bringing all the other brands in the spotlight. I really believe if this board had kept Johnson around another year we would see the beginnings of a stabilization. They got scared, they have thin skin, or maybe its just really uncommon to be a long term value investor these days, especially if all these news publications paint you badly. One thing I am so thankful with SHLD is Lampert is so low profile and low key, there is nearly nothing to say about him. No TV appearances, nothing outside the shareholders letter. They cant even skewer the guy, unlike Johnson who had about 10 articles the past 3 months in BusinessInsider calling him a disaster. Well I guess bad press these days really matters.

 

Tune out the noise guys, that's what I like to hear from Berkowitz, ignore the crowd.

 

Happy investing! I'm done talking about JCP for a long, long time.

[sampr01]

Hi Texual

 

I have a different point of view. Please show me one thing Ron did that worked (other than coming up with idea, his hand picked team was gone, and everything else is a diaster). Why are you blaming Ackman for this, and I think its a good move (I think they will spin off REIT-thats why may be they hired Ex CEO), if they running out cash then they should attract customers and build cash.

 

I like ackman and invested in GGP because of him (only small positions).

 

I am planing on going with 2015 calls ($18 or $20 calls) and hope they will spin off REIT like HHC.

Enjoy

 

And you would be completely right. I thought the same thing. I just forgot for a brief moment we had owner's who were spineless. Ackman is officially the worst public hedge fund manager who gets a lot of attention for no reason. He is neither value, long term, imaginative, or anything. The hardest part would be the initial surge of closed off space, and culminating in Martha Stewart shops being huge draws, bringing all the other brands in the spotlight. I really believe if this board had kept Johnson around another year we would see the beginnings of a stabilization. They got scared, they have thin skin, or maybe its just really uncommon to be a long term value investor these days, especially if all these news publications paint you badly. One thing I am so thankful with SHLD is Lampert is so low profile and low key, there is nearly nothing to say about him. No TV appearances, nothing outside the shareholders letter. They cant even skewer the guy, unlike Johnson who had about 10 articles the past 3 months in BusinessInsider calling him a disaster. Well I guess bad press these days really matters.

 

Tune out the noise guys, that's what I like to hear from Berkowitz, ignore the crowd.

 

Happy investing! I'm done talking about JCP for a long, long time.

[Vish_ram]

One way JCP can be salvaged is to continue working on store within store concept. To bring back the lost customers, they can keep a section calling it Classic JCP, and pile up old stuff in worn out racks that elders want; this becomes a win-win. this would help in transition process.

 

This whole episode reminded me of a grocery retailer in India that setup super clean stores with stuff neatly arranged. the common folks who are accustomed to see stuff piled up, dirty, thought they were getting a good bargain. when they saw this new retail shops with clean aisles and stuff, they were put off thinking that they were getting ripped off.

 

[Yours Truly]

As a shareholder of both TJX and ROST, I hope JCP stays alive :)

[JSArbitrage]

JCP debt could be interesting right now.  There is a note maturing in 2 years that yields 8.5%.

[17thstcapital]

JCP debt could be interesting right now.  There is a note maturing in 2 years that yields 8.5%.

 

8.5% doesn't seem all that attractive for unsecured risk IMO, especially as you're about to get layered with secured debt ahead of you.

 

The long duration lowest dollar priced bonds, however, could be interesting.  Let's see where they trade in the coming weeks.

[compoundinglife]

This whole episode reminded me of a grocery retailer in India that setup super clean stores with stuff neatly arranged. the common folks who are accustomed to see stuff piled up, dirty, thought they were getting a good bargain. when they saw this new retail shops with clean aisles and stuff, they were put off thinking that they were getting ripped off.

 

This reminds me of a quote from the Costco CEO on the CNBC special about Costco. It was something to the effect of "You would believe how much it costs to make our stores look cheap!".

[stahleyp]

J.C. Penney Hires Blackstone to Help Raise Capital

 

http://news.morningstar.com/all/dow-jones/us-markets/201304111945/000704/jc-penney-hires-blackstone-to-help-raise-capital-sources.aspx

[tng]

JCP debt could be interesting right now.  There is a note maturing in 2 years that yields 8.5%.

 

I am keeping an eye on the fixed income as well. The biggest risk is the upcoming quarters though, JCP might not have enough cash to make it to the end of the year if they don't raise capital, so you are taking the biggest risk even with the short duration bond. Anybody have any insight into JCP's real estate? I know Sears common stock hasn't done that well over the years, but the bonds have been great because there is a ton of real estate to back it up (you'll likely get 100 cents on the dollar) in the event of a bankruptcy. Didn't have enough time to delve into JCP yet.

[sampr01]

who told you that JCP doesn't have capital to make it to end of the year. They have revolving credit facility for $1.8 b and more.

Read BTIG analysis on yesterday's wall street article.

 

http://www.btigresearch.com/2013/04/12/j-c-penney-hysteria-and-reality/

 

 

enjoy

 

JCP debt could be interesting right now.  There is a note maturing in 2 years that yields 8.5%.

 

I am keeping an eye on the fixed income as well. The biggest risk is the upcoming quarters though, JCP might not have enough cash to make it to the end of the year if they don't raise capital, so you are taking the biggest risk even with the short duration bond. Anybody have any insight into JCP's real estate? I know Sears common stock hasn't done that well over the years, but the bonds have been great because there is a ton of real estate to back it up (you'll likely get 100 cents on the dollar) in the event of a bankruptcy. Didn't have enough time to delve into JCP yet.

[sriraja]

I also remember seeing one of Tilson's slides where he talks about JCP's Real Estate value to be somewhere between $12-18/share. Will post the slides if I can find it.

[PlanMaestro]

Just thinking out loud on this one. I have no idea whether this is a good thing or a disaster. But I wonder how hard it really is for them to make a big push here. They could run a "we missed you, we're back!" ad campaign and really shoot out a ton of coupons. I think people overestimate a bit whether old customers would refuse to come back. At the end of the day what does someone really care?

 

http://online.wsj.com/article_email/SB10001424127887324345804578423081955213990-lMyQjAxMTAzMDEwNDExNDQyWj.html