As some readers may remember, I presented my thesis for an investment in J.C. Penney (JCP) in late June; I plan on continually updating my thoughts on GuruFocus and will highlight key events as they come along. On Tuesday, CFO Ken Hannah presented at the Goldman Sachs (GS) 2012 Global Retail Conference; here are some of the important notes from the call:
“We’re very excited about the early read on the events that have happened in the store recently,” with specific mention of the free haircuts for back to school (1.8 million kids).
Shops were opened across 700 stores on August 1, with additional shops in those same 700 stores on September 1, all one month’s time (this is just the start, and the pace of change will continue to be rapid); the plan is still for $850 million in capex for the year, with the majority being spent on the store transformation.
“We saw enough in the August shop performance to remain committed to this strategy… we believe we’ll have around 40 shops in our stores next year with the goal of eventually moving to 100 shops inside our [each] store.” Mr. Hannah also added that if results start to come in better than expected, the company could accelerate the rollout – the only real constraint is capital.
When asked why he took the job, Mr. Hannah specifically mentioned that Ron Johnson is open to debate and transparent, and is someone he wants to work with on a daily basis – for me, a big relief after some concern about the “resignation” of Michael Francis back in June.
The cost-cutting target of $900 million on an annual (run rate) basis is still the target – the company was at $194 million year over year in the second quarter, and Mr. Hannah says you can expect that to accelerate in the back half.
In terms of the pricing strategy, an analyst commented that he doesn’t believe it was necessary to do in order to access quality brands (a key issue for JCP) – as he noted, look at Macy’s (M), which has quality brands but still offers discounts/coupons. Mr. Hannah responded that “time will tell,” and that the access JCP has to certain brands as a result of their actions will be apparent with time (presumably as shops and brands continue to be showcased one by one in the store).
There are 700 stores with roughly 100,000 square feet, and 400 stores with anywhere up to 50,000 square feet; the 400 stores are generating strong cash flow, and the company is “very pleased” with the performance in those small stores (limited competition) and with leaving those locations as-is for the time being.
The agreements for the vendor and JCP are generally targeted for multi-year relationships; “we want an everyday low cost from them as a partner,” while minimizing the need to push goods through clearance (around 10% selling margin on average, compared to roughly 50% for everyday pricing).
The shares held in the Simon REIT were redeemed at a 20% discount to the market price – partly because management felt the time to monetize that asset (which was selling near all-time highs) while also being able to defer the tax by going directly through Simon was a much better value than by going through the sale on the open market (a question I’ve long been waiting to hear asked – and glad to hear answered!)
On a funny (sad?) note, Mr. Hannah mentioned that he often ends one-on-one talks with analysts by asking them if they’ve actually been into the store and seen the JCP shops, and he is surprised by how few have. Clearly, these are people who have an active interest in the companies that they’re following!
About the author:
As it relates to portfolio construction, my goal is to make a small number of meaningful decisions. In the words of Charlie Munger, "Patience followed by pretty aggressive conduct."
I run a concentrated portfolio, with a handful of positions accounting for the majority of my equity holdings (currently two). From the perspective of a businessman, I believe this is adequate diversification.