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JCP


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2013 Jul 10, 1:51am   50,230 views  111 comments

by SFace   ➕follow (7)   💰tip   ignore  

This is a stock I have been following closely for a long time. Bought when Soros bought and sold before the last earning and made 40% in one month. I have been thinking about them a lot lately and now recommend a strong buy. Here’s a summary of my reasoning and material background.

Who’s long?

Soros and Ackman. A 25% stake held by two of the most respected investor is a good reason for me. Ackman changed my family when (I mom, brothers and close friends, in law) placed a bet on GGP when they announced bankruptcy and promptly went on for a fourty bagger in 4 years using the same reasoning applied by Ackman (real estate was worth too much). If there is a question that asks who is your favorite author, it would be Soros (albeit someone writes on his behalf)

JCP Background (Permanent of Temporary problems)?

JCP has a 100+ year background. 1,100+ department stores scattered throughout the United States and an online store via JCP.com. Over the years, they used their equity to purchase 400+ stores and own the HQ and distribution facilities. The non-owned stores are likely on long term lease with long term options and likely very favorable. In a nutshell, their cost structure is as favorable as any retailer out there. Basically at a market cap of 3.7B, you are getting Penney at less than 4M per department store and $4sale/market cap and an enterprise value above shares (if you count the true market value of real estate that is not marked-up on the balance sheet). The market is pricing Penney like it would be dead (which may or may not be the case). So obviously understanding whether Penney’s problems are permanent vs. temporary is of great interest to me.

The demise of JCP

The great recession impacted everyone including JCP. It hit JCP consumers especially hard unlike Macy’s whose customers are more upscale and wealthy. Unlike the rest that recovered from the recession, JCP sank further and is especially painful given the bull market in 2009-2013.

Long story short, Ackman kicked out Ullman and Ron Johnson was brought on board. Ron brought his own team from Apple and installed his expensive and risky vision and likely created a hostile work environoment bewteen Ullmans and Johnson's people. The strategy employed by JCP should be studied by every business school now in America as it is fascinating. (When I was in college, Dell and IBM was the study case, but now, JCP and BBRY would be my study). The huge difference between Apple retail and JCP retail is about 1M SKU’s and customers that seek the deals. Apple sells Iphone, Ipad, Ibook for the same $599, 1,099 price and sells itself. JCP is a completely different beast. Ron Johnson’s fit was a disaster and under his watch, burned through 1B in capex and burned through another 1B in operating losses and alienated customers. Revenue went from the 17B’s to 12B, practically unheard of in the retail industry to fall that far that fast. SSS was negative 25%. The financial metric was an outright disaster and the PR was a disaster. Further, Johnson got into some legal issues with Martha Stewart and Macy. If there was ever a board you want to be a fly on the wall, JCP was the one to see what the Board asks and how Johnson responded. In March, Johnson out and familiar face Ullman in. Penney was described as a disaster, mess and much worst. Soros buy.

Here was some of JCP’s problems:

•Fair and square pricing in lieu of discounts on top of discounts. This was a bad maneuver. Customers like to feel like they got a deal and there are customers that buy and not look at price tag. In the first category, you lose customers who are trained on feeling like they got a deal, in the second category, you underpriced the product and lost revenue. The retail world sells inventory in full retail price when it is fresh off the shelves and discount it to get rid of it. It is the straightforward and proven way to manage inventory. When you sell 100K different things, that is the only way to go. This is a temporary problem not a perm problem.

•Cap-ex and shop in shop. In all fairness, Johnson was either going to be a hero or a zero. The shop in shop concept is actually well deployed in places like Asia and successful, it gives branded retailers incentive and push to partner with JCP. Ullman already started with the Sephora make-up store and by all accounts, it was successful. Johnson pressed the button to cap-ex the home store, clothing store and children’s store. It’s probably one of the biggest riskiest bet for retail. (huge cap-ex, taking out floor space and sacrifice performance and you have customers that may not accept the new brands). The dumped St. John which was a basic men's category which was a huge mistake.

A lot of the cash burn and SSS was expected. That strategy is yet to be determined. I have been visiting JCP a lot lately in different areas of town and observing traffic and conversion. I went on mother’s day and father’s day to further look at foot traffic and conversions as those are key dates to department stores. It’s been mixed.

Overall, I’m a believer in the strategy. Once the home store are all in business, the Disney stores comes in for back to school and all the shops are in place for the critical holiday season, JCP may be in business and I would not be surprise they can get back from 12B – 17B. It takes 6 months of planning to deliver results as decisions are made now for the critical holiday month and JCP is as focused as it has ever been in 100 years. lol A good friend of mine works at Levi’s and they are pleased with the Levis store at JCP and am working hard to increase traffic there specifically. More so than selling more jeans to Macy's as they have more reasons to see JCP do well than Macy's.

• Win back lost customers: I don’t think consumer hold any grudge against JCP. In the end, JCP is an anchor store on one of the wing. They’ll come as long as the consumer confidence and economic environment is fine and get used to shopping by brand instead of category. bring back what works for the older shoppers and continue to engage the younger shopper it was trying to appeal to. It’s a matter of getting the right product at the right price and become cusomer focused. It’s not terribly new anyway as Macy’s have their branded stores anyway.

• Retail climate. JCP is shielded from Europe and Asia so their health is based solely on the American consumer and betting on the american middle class. Online stores have been eating everyone but I don’t think malls are going away, just need to be righsized. It helps JCP that fair market act are coming on board (possibly) and Obamacare penalty provision are delayed another year. The US tax system,(inluding locally) and policies will be generally supportive of domestic business that hires American workers.

So I’ve convinced myself to buy JCP again (thinks the big issues are temporary). It is a great risk vs. reward play. I really think by back to school and this Christmas, JCP will be clearly trending up again. They have a lot of press lately and I think they have a legit shot once all the stores, marketing, promotions, brands are finally on line at the same time (by back to school). Downside $12 by December and upside $30 if it is clear their turnaround efforts are (not)working and funds will come on board big time.

I am long @ a tad under $17. (Sold for $13 when Ackman was out) Good luck.

#politics

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18   Y   2013 Jul 13, 6:31am  

I think the biggest impact in the revenue drop is due to the "no cash register" model, and the demise of the unique brands like St Johns Bay. The new CEO is turning all this around....who wants to go searching for someone so you can checkout? That was a stupid idea.

19   Y   2013 Jul 13, 8:35am  

Just came back from the mall on a sunny saturday afternoon.

Nordstroms: Packed with shoppers. displays everywhere. #1 for today.

Macys: Not as many, but a lot. Products and displays everywhere. Glittercity.

JCP: 50% less than nordstroms..almost a ghost town. They are trying to get their little stores set up...some cash registers in place...but traffic still very slow.
Displays are much more conservative and spread apart. The place looks like it has about half the selections of the other two stores...They are having sales now. some sales signs up.

20   Goran_K   2013 Jul 13, 11:59pm  

SFace says

100% inaccurate. JCP.com lost 33% vs, 25% for the store. Online was a disaster.

You are right, my info on online was outdated. In fact the JCP online store from 2011 to 2012 YOY also suffered a massive loss.

"In the past year, online was operating as a separate business, he said. And out-of-stock merchandise and website failures resulted in 33 percent decline in online sale last year to $1.02 billion."
http://www.dallasnews.com/business/retail/20130516-j.c.-penney-widens-loss-but-returning-ceo-says-its-fixable.ece

That actually makes JCP worse off than I initially thought.

SFace says

Inaccurate. The catalog was discontinued in 2009 for 2010. Catalog is not the problem.

Are you making stuff up SFace? JCP continued to operate (and close) Catalog stores well into 2011 during Ron Johnson's tenure with the company. The last stores didn't close until the end of 2011 when 15 of them were sold to SB Capital Group in October of that year.
http://abclocal.go.com/wpvi/story?section=news/business&id=7917668

http://www.sbcapitalgroup.com/news/item.cfm?id=109

Who is being inaccurate now? Anyway, my point was that the catalog stores were a big part of the JCP business model for such a long time, and that model could simply not survive because it's a dinosaur just like JCP is as a company.

SFace says

SG&A are fixed, It works both way, if you can improve gross margins with the same fixed costs, the cash flow turns around easilly. That's why momentum is huge and we have seen negative momentum. Q2 is likley YOY decline, but Q3 and Q4 their big season will comp positive.

Don't disagree with this, but do disagree that suddenly JCP is going to pick up momentum in Q3 and Q4. I especially love the statement "if you can improve gross margins", ah, isn't that the trick though? :)

See the thing you don't seem to understand SFace, or seem to be obliviously walking into with your wallet unfortunately, is that the reason JCP is doing so badly is because there has been a structural change in how the population perceives retail, and it's only accelerating. It's not just about online. JCP has not managed to adapt as well as its competitors at its brick/mortar locations too. There are many volumes written about it online, but suffice to say, there's a reason why a company like K-Mart has fallen so far behind Target, even though both companies sell essentially to the same demographic and (used to) have roughly the same amount of stores.

You're investing into JCP's proposed new line of horse carriages, and the general population has moved onto automobiles. Good luck with that.

21   Goran_K   2013 Jul 14, 12:13am  

SoftShell says

I doubt the tactic below accounts for more than 1-2% of the sales drop.

Don't agree.

Online clothing retail alone is now a $40 billion dollar industry growing at a CAGR of 10% according to Forester. According to the same source non e-commerce is growing at 3%. So it's not a 1-2% shift/change according to the data available, it's shifting a lot faster than that.

By comparison, online sales of computers and consumer electronics, one of the biggest online segments, is a $50 billion industry.

SoftShell says

Nordstroms: Packed with shoppers. displays everywhere. #1 for today.

Macys: Not as many, but a lot. Products and displays everywhere. Glittercity.

JCP: 50% less than nordstroms..almost a ghost town. They are trying to get their little stores set up...some cash registers in place...but traffic still very slow.

Displays are much more conservative and spread apart. The place looks like it has about half the selections of the other two stores...They are having sales now. some sales signs up.

At least you can go to a JCP store. There is literally ONE JCP in all of South Orange County, and it exist at the smallest, and least popular mall in South OC (Laguna Hills Mall). By comparison, you can get to 4-5 Macy's in the same geographical area.

The largest and most profitable mall in OC doesn't even have a JC Penney (South Coast Plaza). That's very telling IMO.

22   Y   2013 Jul 14, 1:12am  

I was referring to the tactic of physically going to a JCP store, examining the merchandise, getting back into your car, going home, and finding the same item online, waiting for delivery instead of instant gratification, and paying shipping/handling costs which would eat up most of the savings of buying online.

Do you think most people buying online employ the above tactic?

Goran_K says

SoftShell says

I doubt the tactic below accounts for more than 1-2% of the sales drop.

Don't agree.

Online clothing retail alone is now a $40 billion dollar industry growing at a CAGR of 10% according to Forester. According to the same source non e-commerce is growing at 3%. So it's not a 1-2% shift/change according to the data available, it's shifting a lot faster than that.

By comparison, online sales of computers and consumer electronics, one of the biggest online segments, is a $50 billion industry.

23   Goran_K   2013 Jul 14, 1:31am  

APOCALYPSEFUCK is Shostakovich says

Bricks and mortar retailers are Amazon showrooms.

This is funny, but true.

24   Goran_K   2013 Jul 14, 1:34am  

SoftShell says

Do you think most people buying online employ the above tactic?

I think it happens a lot more than you think. I think "instant" gratification is a valid point, but not when the price difference is too wide.

As for shipping/handling eating up savings, that's a misnomer. American Eagle offers free shipping practically every week (I buy their jeans online since I know how their straight leg 32 waist jeans feel already since I own 4 of them). In fact, I just randomly checked right now and they have another free shipping weekend.

The margins on online e-tailing are so good, companies are willing to front the shipping charges, especially once a customer hits a certain purchase minimum.

25   Goran_K   2013 Jul 14, 1:36am  

APOCALYPSEFUCK is Shostakovich says

Amazon is going to pick it up at the firesale for pennies on the dollar from the trustees after the stock is delisted and begin attacking retailers on the ground as well as through direct delivery etail channels.

I'm going to buy a dozen JC Penney mannequins for target practice with my cross bow.

26   New Renter   2013 Jul 14, 1:44am  

Goran_K says

APOCALYPSEFUCK is Shostakovich says

Amazon is going to pick it up at the firesale for pennies on the dollar from the trustees after the stock is delisted and begin attacking retailers on the ground as well as through direct delivery etail channels.

I'm going to buy a dozen JC Penney mannequins for target practice with my cross bow.

Good idea! AF should pick up a few hundred for his twirly gun.

27   Goran_K   2013 Jul 14, 1:52am  

That would be a good move for JC Penney. Do you think it would improve their market viability AF?

JC Penney, the place where you can test out your ordinance on well dressed mannequins.

28   New Renter   2013 Jul 14, 4:14am  

Goran_K says

That would be a good move for JC Penney. Do you think it would improve their market viability AF?

JC Penney, the place where you can test out your ordinance on well dressed mannequins.

Just what is the well dressed realtor wearing these days?

29   swebb   2013 Aug 1, 3:45am  

@SFace Any updates on JCP? I have been following it since you posted originally, but I haven't jumped in yet. I noticed the leg down yesterday - thoughts?

30   Goran_K   2013 Aug 1, 3:48am  

If JCP goes above it's 2013 $22.47 high ever again, I'd be surprised.

31   B.A.C.A.H.   2013 Aug 1, 5:36am  

Those stores in my region are bleak, desolute, shoddy looking places. Kinda like Detroit I suppose.

32   AverageBear   2013 Aug 1, 8:56am  

zzyzzx says

I also hate retail stocks.

---------------------------------------
I also hate retail stocks. As I slowly build out my portfolio, the only retail stock I plan on investing in, is Walmart (WMT), w/ a decent/OK dividend of 2.4%... Not a bad deal w/ a P/E of 15.4 ........ A buy and hold proposition, especially when history tells us it doubles it dividend payout every 3-4 years....

http://www.dividendgrowthinvestor.com/2012/08/wal-mart-stores-wmt-dividend-stock.html

...."The annual dividend payment has increased by 17.90% per year over the past decade, which is higher than to the growth in EPS."......

...."An 18% growth in distributions translates into the dividend payment doubling every four years. If we look at historical data, going as far back as 1978 we see that Wal-Mart Stores has actually managed to double its dividend every three years on average.

The dividend payout ratio has increased from 16.60% in 2003 to 32% in 2012. The expansion in the payout ratio has enabled dividend growth to be faster than EPS growth over the past decade. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.".......

33   Goran_K   2013 Aug 2, 5:27am  

I knew this one was a loser as soon as this thread was posted.

Where are you at e-man?

35   Facebooksux   2013 Aug 3, 3:58am  

hanera says

Thanks, SFace. Loaded 500 shares.

How's that anonymous forum stock advice working out for you?

36   Philistine   2013 Aug 3, 5:20am  

CIT will not state directly if they are pulling back on JCP, but they have already stopped factoring some of JCP's suppliers, which is going to hurt Penney's in the short term on deliveries for August.

I can tell you that when CIT starts getting skittish, it is bad tea leaves for the retailer. This is exactly how things started going down last year when the Baker's chain of shoe stores filed bankruptcy and finally liquidated. CIT was the last straw that really put them out.

http://www.reuters.com/article/2013/07/31/us-jcpenney-cit-idUSBRE96U18P20130731

This article shows the PR agents are in full denial mode:

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

37   Goran_K   2013 Aug 4, 5:06am  

Facebooksux says

How's that anonymous forum stock advice working out for you?

lol

E-man, where you at?

38   Goran_K   2013 Aug 7, 5:02am  

E-man says

Thank you for thinking of me. ;) I guess you could say that I avoided the disaster because I've been busy remodeling one of our recent acquisitions and had no spare time to buy stocks. I'm one of those lucky guys that god is always looking out for me. Well, at least that's how I feel.

Lucky you! God is good. Are you going to take back your high-five from SFace now or does he get to keep that?

Sitting on cash, strangely, actually seems to be a sound strategy at the moment.

E-man says

I think you took SFace's post the wrong way. It was a risk and reward trade. He mentioned the potential downside is $12 with the potential upside of $30. $5/share loss for a potential gain of $13/share. It was a trade, not an investment. If things don't turn around by the end of 3rd quarter, it's time to swallow the pride and cut the losses. That's how I would do it.

Maybe. Though I never saw the potential upside (as explained by all of my previous post about big box retail stocks). The time to swallow pride and cut losses was right before he thought buying JCP was a good idea.

39   Eman   2013 Aug 8, 7:37am  

"Are you going to take back your high-five from SFace now or does he get to keep that?"

Nope. I still give him a high five. It's way too easy to be a critic. SFace stuck his neck out there with this purchase as well as a call to double up on FB. How many critics on here, other than a few, have the balls to show their actual trades/purchases. Most are nothing, but a bunch of Monday night quarterbacks.

40   Goran_K   2013 Aug 8, 8:40am  

Plus, he's your buddy, you can't diss him out in public right?

E-man says

How many critics on here, other than a few, have the balls to show their actual trades/purchases.

Not me for sure. If I have a winner, I'd definitely not share it publicly on the board. Why would I do something like that?

41   anonymous   2013 Aug 8, 8:54am  

Goran_K says

Plus, he's your buddy, you can't diss him out in public right?

E-man says

How many critics on here, other than a few, have the balls to show their actual trades/purchases.

Not me for sure. If I have a winner, I'd definitely not share it publicly on the board. Why would I do something like that?

Why not? You place your order, and then hit submit on your forum post. Pretty simple. Its not like a bunch of anons are going to read your post and then rush to the window and bid you out of your price,,,,,if anything, you want more action following you through the door!

Now, if this were a sports handicapping site, I could see the concern, if we were sniping openers on wnba sides, or tennis matches, or ncaabb over unders. You fire a dime into a small market like that, and have an following on the interwebs, you risk your buddies cutting in front of you in line, and stealing your price.

As eman reminded, sface said downside 12, upside 30.

42   Goran_K   2013 Aug 8, 9:13am  

errc says

if anything, you want more action following you through the door!

Good picks will have that anyway.

But offering that good fortune to random people on the internet who don't know already? I don't see the benefit personally.

44   Goran_K   2013 Aug 9, 9:05am  

FortWayne says

They are even struggling to find someone to lead the company...

http://online.wsj.com/article/SB10001424127887323977304579002722878021610.html?mod=WSJ_hps_LEFTTopStories

Let's see. You're an up and coming CEO, or perhaps someone who has successfully run a mid-cap level type of company.

The JCP position opens. The company experienced a 33% YOY revenue drop. Their online store is tanking. They got rid of the entire catalog store department in 2011. They're being outmaneuvered by their competitors.

Would you risk your career by jumping onto a sinking ship, and being known as the guy who went down with JCP?

45   Goran_K   2013 Aug 13, 10:24am  

Just dipped below 13. It's dead Jim.

46   Goran_K   2013 Aug 14, 1:32am  

When it comes down to it, Ackman is a man-child, and he's sinking his own ship by acting like one.

47   Y   2013 Aug 14, 2:06am  

Time to buy. It's at the all time low...it'll recover to at least 17....

48   Goran_K   2013 Aug 14, 2:15am  

SoftShell says

Time to buy. It's at the all time low...it'll recover to at least 17....

The board is literally at each other's throats. Ullman supporters and Ackman supporters are turning this company into a clown show. Ackman left the board yesterday.

I'd wait until at least sub-10 like 2000. The thing is, I don't know if we'll see a sky rocket recovery with JCP like in the 2000s. Retail space has shifted significantly raising the risk, and that big elephant Amazon is only getting bigger.

Unlike 2000, I think this could be JCP's death spiral. Time to short.

49   Y   2013 Aug 14, 2:28am  

I agree. But with all death spirals, there will be periods of apparent recovery. The shopping season is right around the corner. JCP has 1.5 billion cash and 4 billion of real estate to make a short term go of it. Must keep an hourly eye on CIT to see if/when they bail on financing JCP. When they bail, everyone must bail.
Buy low, sell high....they are now LOW.
past 2 years they've had a nice bump from august through october...

https://www.google.com/finance?q=NYSE:JCP&sa=X&ei=ia8LUtH3MMSEyAHU0YHYAg&ved=0CDgQ2AE

Goran_K says

Unlike 2000, I think this could be JCP's death spiral. Time to short.

50   Goran_K   2013 Aug 14, 2:31am  

How big are you going in?

Good thing though, I think e-man will magically find his shares that "he forgot to buy" if they do recover. Maybe you can get some from him if they miraculously go back above 14.

51   zzyzzx   2013 Aug 14, 2:32am  

I'm sure I have said this at least once here, but I really hate retail stocks.

52   Goran_K   2013 Aug 14, 2:34am  

zzyzzx says

I'm sure I have said this at least once here, but I really hate retail stocks.

A lot of reason to.

53   Y   2013 Aug 14, 2:38am  

I wasn't planning to.
Strictly mutual funds. don't have time to follow all this shit on a consistent basis.
but looking at JCP over the past 10 years on that yahoo stock chart, it seems they always get a good bump from mid august to end of september-november timeframe.

Given their cash and real estate holdings, it seems like a good short term ( 1-2 months ) bet. I might break my rule and buy a tiny bit for the fun of it....say 1k worth...

Goran_K says

How big are you going in?

54   hanera   2013 Aug 14, 4:51am  

AAPL is a retail stock, traders love it now.

55   Goran_K   2013 Aug 14, 5:55am  

hanera says

AAPL is a retail stock, traders love it now.

He's referring to big box retail.

56   Hysteresis   2013 Aug 27, 3:13pm  

anyone that bought on july 10th when this was posted and sold today would be down 22.76%.

ackman bought at $25 and sold his entire position at ~$12.50/share, which means he stands to lose $470 million dollars. lol.

57   Eman   2013 Aug 28, 3:04am  

Hysteresis says

anyone that bought on july 10th when this was posted and sold today would be down 22.76%.

ackman bought at $25 and sold his entire position at ~$12.50/share, which means he stands to lose $470 million dollars. lol.

So that makes you smarter than Ackman?

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