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J.C. Penney's Turnaround Not Quite Turning

February 28, 2013 | About:
U.S. market continued their climb on Wednesday and are now close to all time highs. We will see if the sequester and recent economic data will put an end to that. Prior to the opening bell, reports showed the U.S. economy barely grew 0.1% in the fourth quarter. The growth rate was the slowest since the first quarter of 2011 amid lower military spending which is expected to reverse in the first quarter.

Earnings

A couple of retailers are down sharply following disappointing earnings reports. Value investors would be interested in the turnaround at J.C. Penney (JCP) which isn’t quite turning.

J.C. Penney (JCP) reported a much larger than expected loss as same-store-sales (SSS) continue to decline. Sales declined 28% from the prior year and many analysts on Wall Street are starting to lose confidence on the turnaround as the company continues to lose cash and same store sales continue to decline. For its fourth quarter, JCP’s net loss was $428 million or a loss of $1.95 per share excluding items. Analyst were expecting a much smaller loss of $0.18 per share. Seems like this is the big year for CEO Ron Johnson who was quite disappointed with the company’s yearly results.

"Sales and customer traffic were below our expectations in 2012," Johnson in a statement.

For those new to the whole J. C Penney story, after having huge success at Target (TGT) and Apple (AAPL), Johnson was hired to bring some new life into the century-old retailer. Backed by Pershing Square’s Bill Ackman, Johnson introduced a turnaround strategy that would transform the company completely. Everything from its Plano, Texas headquarters to the look and feel of the stores would be completely revamped, including the discontinuation of coupons and sales. But Johnson knew there would be some speed bumps along the way as customers get used a J.C. Penney without daily discounts. What he did not guess is that same store sales would continue to slide despite his efforts, and my guess is he is realizing that he needs to stop the bleeding and to do so fast as he once again started to introduce sales. Johnson is hoping this is the year that the turnaround turns the corner.

"All we need this year is to return to growth, whether it's 1%, 5%, 10%," Johnson said in an interview with the

Wall Street Journal late last month. "When we return to growth, we can generate cash. If we start with the right amount of cash, we just continue with transformation."

Gurus have been buying J.C. Penney at or around these levels with several establishing a new position. These Gurus include:

All these are relatively small positions when compared to their overall portfolio. But the one Guru to pay attention to is Bill Ackman, who continues to hold his original shares and has backed the turnaround despite its struggles. J.C. Penney represents 8% of the Pershing Square portfolio with an average cost around $19.

The other major mover is Groupon (GRPN) which reported a fourth quarter loss of $0.01 versus analyst expectations of a gain of $0.03. Overall, the company reported nothing but bad numbers and analysts began to downgrade the stock left and right. For the first quarter, the company is forecasting revenue between $560 and $610 million, well below analyst expectations of $650 million. There are signs that growth is already slowing for the daily deals website as it continues to face competition from the likes of Google (GOOG) and LivingSocial. For example, last quarter the company started taking a smaller share of revenue on daily deals in order to attract new customers and keep current customers.

Gurus have been selling out of Groupon. Those selling out in the last two quarters include:



Shares of Groupon have dropped 70% since its IPO. Shares were down more than 20% in early trading following a string of analyst downgrades.

Disclaimer: None

Rating: 1.7/5 (7 votes)

Comments

ramands123
Ramands123 - 1 year ago


And you call yourself a long term value investor ? Give them some time, they have only changed 10 % of the store.. they realized thier mistake with coupons and have fixed it going forward.

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