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A Look at George Soros’ Investments in the Retail Sector
Posted by: Patricio Kehoe (IP Logged)
Date: October 8, 2013 09:41AM
The retail business is tough. Consumers are not loyal customers and will switch if the retail experience does not conform to their expectations. Economic woes have made increasing sales difficult, and J.C. Penney (JCP) and Macy (M)'s have taken steps in different directions to revert this trend. Following investment guru George Soros’ purchase of shares of both firms, I intend to hash which one is the better investment option.
Making Partially Correct Decisions
J.C. Penney has been operating a department store chain in the U.S. since 1902. Following its failed attempt to reinvent itself in 2012, CEO Ron Johnson designed a plan to attract new customers. The strategy included the opening of 565 store-within-a-store boutiques, barber shops for children, and free Wi-Fi at their stores.
Despite J.C. Penney’s efforts, most of these ideas were not successful and have represented an increment in costs. Offering Wi-Fi in a department store, which is meant for shopping rather than surfing the internet was a complete failure. The firm had to admit the resource was not being utilized as anticipated, and cut the $7 million a year service last month. Also, the clerks armed with iPads, implementing mobile checkouts, and thus eliminating registers, alienated customers and the service will also be eliminated.
Yet not all is lost for the retailer. Its Disney boutiques, forming part of its store-within-a-store idea, seems like a great idea to attract new customers. By offering unique products and bringing in characters from Monsters University, Toy Story, and Tangled to their physical locations, J.C. Penney could make the turnaround it has been hoping for. George Soros of Soros Fund Management at least seems to have liked the idea, as he recently bought into the firm, which now constitutes 3.7% of his portfolio.
Although the firm has been undergoing transformation and a bright future is not yet tangible, J.C. Penney is not yet defeated. If it manages a turnaround in its declining sales, it can make up for lost ground. Since it is currently trading at 0.1 times its trailing sales, the company comes at a price discount to the industry average. Although the firm has enough cash flow and liquidity to pull through the tough times, I believe you should hold on this stock.
Making the Right Decisions
Macy’s sells consumer goods through over 850 stores in the U.S. and Puerto Rico. Apart from its Macy’s brand, the firm also owns Bloomingdale’s, which caters to high end customers, and has recently entered a partnership with Finish Line Inc (FINL). Since J.C. Penney is currently going through some hard times, Macy’s is looking to use the opportunity to lure more customers to its stores, especially during Christmas.
Since the footwear sector is doing better than the apparel segment, the strategic move to partner up with Finish Line, has already shown good results. Also, by appealing to high end customers at its Bloomingdale’s stores, the firm has benefitted from the economic recovery in the U.S. and the increasing sales of premium products. Since the company has increased penetration of its exclusive label brands, sales are bound to continue rising in this segment.
The My Macy’s initiative has also proven to be a success. By focusing on offering merchandise on a more localized basis, the firm was able to create a better retail experience for customers. Along with its online business and the centralization of its back-office functions, the firm has seen improving margins and reduced risks related to economic cycles.
Just as with J.C. Penney, George Soros bought a significant stake in Macy’s, which currently offers a 2.04% dividend yield, compared to J.C. Penney’s 1.5%. Since the firm is currently trading at 0.6 times its trailing sales, and valuation has gone down by around 10% as of late, now seems a good entry point into the retail sector for investors. Due to the different initiatives Macy’s is putting in place and the expected benefits of J.C. Penney customers turning to the competition, I feel highly optimistic about this stock.
High-End Customers and Good Administration
While retailers have seen their shares drop in recent months, some fear consumers are cutting back on expenditures and saving up for important items, such as automobiles. Since discretionary purchases are just regaining strength in a recovering U.S. economy, catering to the wealthy is sometimes more beneficial. Due to Macy’s ownership of Bloomingdale’s, its new initiatives such as My Macy’s, the online business and its back-office centralization, the firm is a great investment option.
Disclosure: Patricio Kehoe holds no position in any stocks mentioned.
Guru Discussed: George Soros: Current Portfolio, Stock Picks
Stocks Discussed: JCP, M,