Was Bill Ackman Wrong about JCP?
Today, the company reported earnings that were wildly disappointing.
"The net loss of $123 million, or 56 cents a share, in the three months ended Oct. 27 compares with a loss of $143 million, or 67 cents, a year earlier, the Plano, Texas-based company said today in a statement. Excluding restructuring and management- transition costs, the loss was 93 cents a share."
Most concerning is the fact that sales are falling at a rapid clip.
"The retailer’s third-quarter sales fell 27 percent to $2.93 billion, trailing analysts’ average estimate of $3.27 billion. Revenue declined by more than 20 percent in the first and second quarters. Same-store sales fell 26 percent in the third quarter, more than the 15 percent decline estimated by analysts surveyed by researcher Retail Metrics Inc."
Here is the core of Ackman's investment thesis:
Competitors have been winning, but J.C. Penney has advantages it can utilize. The company owns much of its real estate and has affordable leases for the rest. It has huge scale, attracts national brands and has the capacity to spend a lot of money on advertising.
Ackman thinks J.C. Penney stock could trade between $77 and $125 in 2014. He refers to J.C. Penney's sales per square foot in 2007, which he believes is a base case. That, combined with the cuts in expenses, would cause EPS of $6 in 2015. His upside case is an EPS of $9.25 in 2015. He feels downside is protected because of the leases and real estate controlled by the company, and the fact that the $900 million of cuts in expenses translates into about $2.50 in EPS alone.
Ackman strictly focused on the cost side of the equation and the upside of JCP's real estate holdings. The problem is that investors are focused on sales growth. The era of department stores may be screeching to a halt as consumers continue to flock to Amazon.com (AMZN) and other online retailers.
In addition, if JCP can't make any money using its vast real estate portfolio it suggests that the real estate values may not be as high as Ackman expects. With Best Buy (BBY) and Sears (SHLD) struggling, how many big box retailers would want to purchase JCP's real estate holdings?
Although it will take a few years for the JCP turnaround story to manifest, it appears as though Ackman misjudged the problems in the bricks and mortar retail industry as a whole.