JCP - JC Penney

[fareastwarriors]

J.C. Penney Sees Improving Sales Trends

 

http://online.wsj.com/news/articles/SB10001424052702304626104579123070071411760?mod=WSJ_business_whatsNews

 

 

 

At stores opened more than a year, sales fell 4% last month, an improvement over the roughly double-digit declines in August and the second quarter.

 

"Over the last six months, we have made significant strides and are now seeing positive signs in many important areas of the business, in spite of what continues to be a difficult environment for consumers and retailers in general," said Chief Executive Myron E. Ullman .

 

[ourkid8]

Is anyone looking at JCP?  It's currently $7.35 and at a 30 year low...

 

Tks,

S

[stahleyp]

I'm looking at it. Haven't made a decision yet. anyone know when their big debt burden is due? Isn't it middle of next year?

[watsa_is_a_randian_hero]

Good chance the equity is a 0 here.  Buy the debt if you want to invest in this.  At this point the equity is an out-of-the-money call option and the debt is the real equity. 

[racemize]

Good chance the equity is a 0 here.  Buy the debt if you want to invest in this.  At this point the equity is an out-of-the-money call option and the debt is the real equity.

 

how big a discount is the debt trading at?

[stahleyp]

Good chance the equity is a 0 here.  Buy the debt if you want to invest in this.  At this point the equity is an out-of-the-money call option and the debt is the real equity.

 

Isn't that already price into the market? I'm wondering when their man slug of debt is due. All they have to do is pretty much not go out of business and the stock could double. Heck a double from here and you're still not to the 2009 low.  I'm still waiting for my mom to tell me she's shopping there again before I buy any. When she told me she stopped shopping there, I decided to stay away. haha

 

Most of the debt is yielding anywhere from 10%-15% (most of it is priced in the 70s).

[xtreeq]

Good chance the equity is a 0 here.  Buy the debt if you want to invest in this.  At this point the equity is an out-of-the-money call option and the debt is the real equity.

 

how big a discount is the debt trading at?

 

You can check the bonds prices here: http://finra-markets.morningstar.com/BondCenter/Default.jsp

[valueinvestor82]

The 10K shows only $200 million due 2015, $200mil 2016 and $285mil 2017, everything else is even later. What debt comes due next year? I don't see anything else. I'm with Kyle Bass (Hayman) on this one, they lost a PR battle and did a poor job of communicating, but it's priced like death warmed over, and all they have to do is regain some of the sales lost due to Johnson. Liquidity concerns are gone too, unless you want to price in a catastrophic, unexpected burn rate. I don't see that happening given managements' guidance. They know their feet are to the fire after the capital raise surprise.

[fareastwarriors]

Real-Estate Pioneer Loses Its Touch

 

Vornado Loses $250 Million on Investment in J.C. Penney

 

Vornado Realty Trust VNO -0.72%  grew from a small, New Jersey strip-center owner to a giant in real estate partly through its strategy of buying big stakes in retailers to get a piece of their valuable holdings of malls, stores and parking lots.

 

But you would never know it from how the company fared in its latest retail deal, a failed investment in J.C. Penney Co. JCP -8.89%

 

Late last month, Vornado sold its remaining 6% stake in Penney for $13 a share, slightly more than half what it paid for the shares three years ago. The company's total loss on the deal was $250 million, or 40% of its initial investment, according to Green Street Advisors Inc.

 

 

http://online.wsj.com/news/articles/SB10001424052702304330904579137852351956452?mod=WSJ_hps_MIDDLENexttoWhatsNewsForth

[stahleyp]

The 10K shows only $200 million due 2015, $200mil 2016 and $285mil 2017, everything else is even later. What debt comes due next year? I don't see anything else. I'm with Kyle Bass (Hayman) on this one, they lost a PR battle and did a poor job of communicating, but it's priced like death warmed over, and all they have to do is regain some of the sales lost due to Johnson. Liquidity concerns are gone too, unless you want to price in a catastrophic, unexpected burn rate. I don't see that happening given managements' guidance. They know their feet are to the fire after the capital raise surprise.

 

Thanks for clearing my confusion up. I just started looking into this one more deeply and thought I may have read a slug was due in the not so distant future - maybe in 2014 or 2015.  Why is this one trashed so much? They have the old management coming in and assuming they can get back to not sucking, it should do pretty well. At the risk of sounding dumb, I really am keeping an eye on my mom with this one too. She is their target demographic and used to shop there all the time. If they can't win her back, it'll be hard to win back others.  Though, I wouldn't be too surprised to see it fall further with tax loss season fast approaching too.

[Guest hellsten]

Buffett said he has a "rooting interest" for the troubled retailer J.C. Penney (JCP) because he worked in one of their stores when he was younger, but acknowledged it's "very, very tough" to compete against competitors who are always moving. "Coming from behind in retailing is just plain tough," he said.

Berkshire companies are still selling a "significant" amount of goods to Penney under "normal terms," he said and he's not worried about the retailer's survival.

http://finance.yahoo.com/news/buffett-debt-limit-weapon-mass-120657166.html

 

I wonder what Mr Warren Buffett exactly meant when he said he's not worried about the retailer's survival… Maybe time to look closer at JCP.

[Guest hellsten]

It's also interesting to see that Soros Management LLC recently made JCP its 4th biggest holding:

https://whalewisdom.com/filer/soros-fund-management-llc

 

Two of the wisest investors alive think JCP will survive… Oh, I forgot JCP is loosing money and is filing for bankruptcy any day now; better put it in the too hard pile.

[Guest hellsten]

I will probably buy some call options tomorrow. I'm doing this for various reasons including:

- JCP is priced for bankruptcy

- JCP looks to have enough liquidity to survive 2014 which might surprise the market

- JCP has motivated sellers who might have been selling for the wrong reasons from my point of view, including Ackman and others…

- I think there are more catalysts than downside risks, i.e. the odds are in my favor  ???

 

Here are some comments from gurus, which probably contain copy-paste errors by me:

 

Warren Buffett

- “When you start arguing with your customers about what they want, it’s not a good idea…[also] they’re up against Amazon (AMZN), [and] they’re moving all the time. I think it’s a very tough game ahead of them.”

- Berkshire companies are still selling a "significant" amount of goods to Penney under "normal terms," he said and he's not worried about the retailer's survival.

 

Hayman Capital

- management miscommunication

- stabilizing the business will be enough

- enough liquidity

- vendors still trust JCP

- 38% dilution disappointing

- not investing in a turnaround

- sold CDS that pay off if JCP defaults on debt

- betting that J.C. Penney can stabilize sales and has enough cash and credit to carry it until the 2014 holiday season

- apparel business is rebounding

- sitting on valuable real-estate

 

Joel Greenblatt

- top of the list on our short list

- eating through lots of cash, everyone knows that

- tough one to turn around

- lot of smart guys there

 

Bill Ackman

3Q, 2013:

- a loss of approximately 50% of our original investment

- disagreement with the board about the timing and necessity for a CEO change

- believed the $2.25 billion Goldman financing would suffice

- became concerned about the board’s and management’s decision making

- key to long-term success in investing is to balance confidence with the

humility to recognize when the facts are no longer consistent with one’s original investment

thesis

- second quarter earnings report has shown some early indications that the company may be recovering (Aug 20, 2013)

- we believe these objectives are achievable (historical levels of gross margins and SG&A reductions), but how much time they will take is more difficult to determine

- historically described JCP as higher-risk, higher-potential-reward investment

 

2012:

- He notes that all the requirements for a turnaround are in place:

- Solid core business with natural competitive advantages

- New, high-quality management team

- Management incentives are aligned with shareholder returns

- High potential new sales strategy

- Abundant "low hanging fruit" in the cost structure to fund sales opportunity

- The hedge fund manager compares the turnaround at JCP to that of The Gap (GPS) in the mid 1980's as that company had a broken model to fix, hired talented new management, implemented a strategy change, and after some poor results eventually turned around and the stock rose ~60x.

[BargainValueHunter]

http://www.valuewalk.com/2013/08/fairholme-fixed-income/

 

Today, 62% of the Fund’s net assets are in cash and cash equivalents. Sears Holdings Corp (NASDAQ:SHLD) bonds maturing in 2018 are the Fund’s largest non-cash holding, at 23% of net assets, followed by the preferred stock of Federal National Mortgage Association (OTCBB:FNMA) / Fannie Mae and Federal Home Loan Mortgage Corp (OTCBB:FMCC) / Freddie Mac, at 6% of net assets, and J.C. Penney Company, Inc. (NYSE:JCP) bonds maturing between 2015 and 2017, at 4% of net assets.

[siddharth18]

So is this a case where buying LEAPs is most efficient way to play this? Binary really...?

[Guest hellsten]

http://www.valuewalk.com/2013/08/fairholme-fixed-income/

 

Today, 62% of the Fund’s net assets are in cash and cash equivalents. Sears Holdings Corp (NASDAQ:SHLD) bonds maturing in 2018 are the Fund’s largest non-cash holding, at 23% of net assets, followed by the preferred stock of Federal National Mortgage Association (OTCBB:FNMA) / Fannie Mae and Federal Home Loan Mortgage Corp (OTCBB:FMCC) / Freddie Mac, at 6% of net assets, and J.C. Penney Company, Inc. (NYSE:JCP) bonds maturing between 2015 and 2017, at 4% of net assets.

 

Those bonds maturing between 2015 and 2017 look attractive, see attached screenshot.

 

The one maturing in 2097 is a long shot to say the least, but who wouldn't want to earn 12% per year without working for the next 70+ years.

[enoch01]

I will probably buy some call options tomorrow. I'm doing this for various reasons including:

- JCP is priced for bankruptcy

- JCP looks to have enough liquidity to survive 2014 which might surprise the market

- JCP has motivated sellers who might have been selling for the wrong reasons from my point of view, including Ackman and others…

- I think there are more catalysts than downside risks, i.e. the odds are in my favor  ???

 

 

Which calls?  I looked at a few 2016's and implied volatility is high.  Maybe just consider common?

[Guest hellsten]

I will probably buy some call options tomorrow. I'm doing this for various reasons including:

- JCP is priced for bankruptcy

- JCP looks to have enough liquidity to survive 2014 which might surprise the market

- JCP has motivated sellers who might have been selling for the wrong reasons from my point of view, including Ackman and others…

- I think there are more catalysts than downside risks, i.e. the odds are in my favor  ???

 

 

Which calls?  I looked at a few 2016's and implied volatility is high.  Maybe just consider common?

 

I'd like to own call options to limit the downside and maximize the upside. I'm not comfortable building a big position in the JCP common, so it's either options leverage or nothing.

 

I'm not an options guru like many on this board. I'm doing this as an exercise to learn more about options. I'll try to figure out which ones are the cheapest through implied volatility and think about where JCP would trade if the business stabilizes before making any decisions.

 

The January 2015 and 2016 call options with strike $8-10 look attractive to me. Any tips on alternative strategies to consider and study that are suitable for JCP would be greatly appreciated.

[Luke 532]

I will probably buy some call options tomorrow. I'm doing this for various reasons including:

- JCP is priced for bankruptcy

- JCP looks to have enough liquidity to survive 2014 which might surprise the market

- JCP has motivated sellers who might have been selling for the wrong reasons from my point of view, including Ackman and others…

- I think there are more catalysts than downside risks, i.e. the odds are in my favor  ???

 

 

Which calls?  I looked at a few 2016's and implied volatility is high.  Maybe just consider common?

 

I'd like to own call options to limit the downside and maximize the upside. I'm not comfortable building a big position in the JCP common, so it's either options leverage or nothing.

 

I'm not an options guru like many on this board. I'm doing this as an exercise to learn more about options. I'll try to figure out which ones are the cheapest through implied volatility and think about where JCP would trade if the business stabilizes before making any decisions.

 

The January 2015 and 2016 call options with strike $8-10 look attractive to me. Any tips on alternative strategies to consider and study that are suitable for JCP would be greatly appreciated.

 

For what it's worth, my favorite approach to calls is usually a call spread.  For example, buying a $10-strike call and selling a $12-strike call.  You get a defined max loss/max profit ratio.

[enoch01]

I will probably buy some call options tomorrow. I'm doing this for various reasons including:

- JCP is priced for bankruptcy

- JCP looks to have enough liquidity to survive 2014 which might surprise the market

- JCP has motivated sellers who might have been selling for the wrong reasons from my point of view, including Ackman and others…

- I think there are more catalysts than downside risks, i.e. the odds are in my favor  ???

 

 

Which calls?  I looked at a few 2016's and implied volatility is high.  Maybe just consider common?

 

I'd like to own call options to limit the downside and maximize the upside. I'm not comfortable building a big position in the JCP common, so it's either options leverage or nothing.

 

I'm not an options guru like many on this board. I'm doing this as an exercise to learn more about options. I'll try to figure out which ones are the cheapest through implied volatility and think about where JCP would trade if the business stabilizes before making any decisions.

 

The January 2015 and 2016 call options with strike $8-10 look attractive to me. Any tips on alternative strategies to consider and study that are suitable for JCP would be greatly appreciated.

 

The common is $6.70, and the 2016 10's are trading at approx. $2.3.  Implied volatility is somewhere around 70%.  With a double in the common, you may only get a 2.5X or 3X with the options.  That's a very high price to pay to be right.  Downside is zero for both.  At this point the common is sort of like an option with an infinite term.

 

If you want to learn about options in this situation, and if you think there is a good enough chance that the common is not a zero, then I would suggest selling puts.  The 2016 $5 puts are selling for 100%+ implied volatility.  People are panicking.

 

I have no position.

[stahleyp]

This is probably pretty stupid, but, enoch, do you calculate implied volatility kinda like this?

 

$2.3/$6.70 = .34% * 2 (2016 options are a bit more than 2 years) = 70%?

 

For the 2016 $5 puts, $2.30/$5 strike = .46% * 2 = 92%?

[enoch01]

This is probably pretty stupid, but, enoch, do you calculate implied volatility kinda like this?

 

$2.3/$6.70 = .34% * 2 (2016 options are a bit more than 2 years) = 70%?

 

For the 2016 $5 puts, $2.30/$5 strike = .46% * 2 = 92%?

 

No, that's not it.  Although it's interesting that the math comes out sort of close :)

 

Test your model like this.  Suppose you wanted a 10 year call, and were willing to buy the same 70% volatility.  What would the price be according to the calculation you have above?  70/10 = "7%" --> $0.47.  Or in other words: $0.47/$6.70 = 0.07, then 0.07 * 10 (for 10 years) = 70%.  You wouldn't pay more for the option to buy something 2 years out than you would for the option to buy something 10 years out, right?

 

Here's a primer on the Black-Scholes model.  It has a helpful spreadsheet to download.

 

http://www.utdallas.edu/~tday/6310FAQ3.html

 

(insert standard disclaimers about option pricing models)

[stahleyp]

Cool. thanks man. much appreciated!  :)

[Guest hellsten]

-8% today…

 

I'm assuming the market knows something I don't know. Most of what I can find online is talk about Twitter rumors:

http://bizbeatblog.dallasnews.com/2013/10/persistent-rumors-follow-j-c-penney-doesnt-matter-if-theyre-false-analyst-said.html/

 

There is no truth to the rumor on Twitter and elsewhere that Penney has hired bankruptcy lawyers, a Penney spokeswoman said.

 

http://bizbeatblog.dallasnews.com/2013/10/persistent-rumors-follow-j-c-penney-doesnt-matter-if-theyre-false-analyst-said.html/

 

Imperial Capital analyst Mary Ross-Gilbert said she is concerned that the “false negative press reports” of rumors will cause publicly traded notes and shares to trade lower.

 

She lowered her J.C. Penney price target to $1 from $5 while saying she believes the rumors “may be inaccurate or potentially misleading,” their existence “appear to be wearing down vendors and management.”

 

“We don’t comment on what is just one analyst’s opinion. However, just as we shared in our progress update on Oct. 8, the company expects to end the year with more than $2 billion in liquidity. When combined with the reported improvements in our business trends, the need for “financial restructuring” is purely speculative and not grounded in fact.”

 

So rumors on Twitter are wearing down vendors and management?

 

Last week, the company publicly denied two Twitter posts saying it had hired a bankruptcy attorney and had lost access to credit in Canada. The stock fell 8.9 percent Oct. 15 and 4.8 percent on Oct. 18, the days the postings appeared.

The attacks are a reminder of social media’s power to undermine the reputation and shares of a public company. J.C. Penney, struggling to turn itself around after the failed strategy of former Chief Executive Officer Ron Johnson, is especially vulnerable to market sentiment.

 

a New York company that analyzes social-media postings for clients.

“They’re paying attention to Twitter in volume,” she said.

 

Social media is definitely a good thing for value investors. The herd of sheep has grown bigger through social media…

 

http://blogs.barrons.com/stockstowatchtoday/2013/10/21/jc-penney-shares-worth-a-buck/

 

Imperial Capital’s Mary Ross-Gilbert offers her answer by lowering her price target on JC Penney’s stock to $1, while cutting her rating on JC Penney’s bonds maturing in 2015-2018 to Sell.

 

We are maintaining our Underperform rating on the shares, but we are lowering our one-year price target to $1 from $5. Our new $1 price target is based on the notional “option” value of the shares, given our increasing concerns the company may engage in a financial restructuring in 2014.

 

In August Mary Ross-Gilbert said JCP was worth $8.

 

There's the false CIT rumor, which supposedly scared the markets:

 

http://www.businessweek.com/news/2013-07-31/j-dot-c-dot-penney-falls-on-report-cit-stopped-funding-some-suppliers

 

“Contrary to the news report, CIT continues to factor and support deliveries from J.C. Penney suppliers,” the Plano, Texas-based store operator said in a statement. J.C. Penney “continues to have ample liquidity to manage its business with expectations to close the quarter with approximately $1.5 billion in cash on its balance sheet.”

 

If so-called factors like CIT stop funding suppliers, it can prompt other such lenders to follow suit. That also would mean J.C. Penney would have to pay for goods in cash when delivered, Liz Dunn, an analyst for Macquarie Group in New York, said in a note to clients. Less than 10 percent of J.C. Penney’s goods are funded by commercial lenders, of which CIT is the biggest, and if it had to pay up front for all those goods it would total about $300 million, Dunn said.

 

Such a move by CIT wouldn’t have been unprecedented. It cut off funding to Sears Holdings Corp. (SHLD)’s suppliers in 2012. Those vendors made up less than 5 percent of sales, Sears said at the time.

 

Am I missing something? Maybe I should start believing in the power and accuracy of social media rumors.

[no_free_lunch]

Hellsten,

 

There is no doubt that the current rumours are over-stated. They are not going bankrupt tomorrow.  Will they be around in 2 years though is a different question.  I really don't have an answer to that question but so far there is little to give me hope.  I find it especially concerning that they pasted negative comps in September.  Wasn't the ship already sinking last September?  It should have been easy comps to beat and they still didn't do it.