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Kyle Bass Joins 6 Hedge Funds Amassing J.C. Penney

September 18, 2013 | About:

Holly LaFon

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Kyle Bass, founder of Hayman Advisors, purchased a 5.2% stake in retailer J.C. Penney, according to a filing with the SEC dated Sept. 3 reported by GuruFocus Real Time Picks. Bass bought 11,428,450 shares in total on Aug. 30. At a closing cost of $12.48 that day, the total transaction amount was almost $143 million.

The buy came several days after Bill Ackman of hedge fund Pershing Square announced he would sell his entire 18% stake in the company, taking a 50% loss on his investment first disclosed in October 2010. Relations between Ackman and the company had soured in August, as the board resisted his demand for a new board chairman. The company also disapproved of his decision to release the lengthy letter calling for a board chairman replacement and accelerated CEO search to the press.

Ackman stepped down from the board on Aug. 13. He was succeeded by Ronald W. Tysoe, “a highly respected retail industry executive who spent 16 years as vice chairman at Federated Department Stores Inc. (now Macy’s Inc.),” the company said in a statement.

J.C. Penney released another dismal quarterly report on Aug. 20, including a drop in net sales to $2.66 billion, compared to $3.02 in the second quarter of 2012. The 11% drop resulted from “failed prior merchandising and promotional strategies, which resulted in unusually high markdowns and clearance levels,” the company said. “The lengthy renovation and disappointing re-merchandising of its Home departments” added to the strain on sales.

On a sequential basis, comparable store sales improved by 470 basis points. Sales also increased each month of the second quarter, a trend the company expects to continue through the second half of the year.

Online sales from the company’s website, jcp.com, declined 2.2% year over year, but improved significantly from the first quarter, and each month within the quarter. July sales increased 14% over the previous year.

The company’s profit margin, which had been in decline for four consecutive quarters, also began to stabilize at 29.6% of sales, compared to 23.8% in the previous quarter, but down from 33.2% in the second quarter of last year. Gross margins were impacted by lower sales, high levels of clearance merchandise and leftover merchandise from the first part of the year.

J.C. Penney’s three-year gross margin history:

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Revenue and earnings at J.C. Penney declined over the past several years even as broader U.S. real retail and food services sales continued to improve, as the following graphs show:

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Mike Ullman III, who returned as chief executive officer of J.C. Penny four months prior to the results announcement, addressed the company’s lagging performance in a statement:

"… We have moved quickly to stabilize our business - both financially and operationally - and we have made meaningful progress in important areas of the business. There are no quick fixes to correct the errors of the past. That said, we have identified the challenges, put solid plans in place to address them and have experienced and capable people in key roles to do so."

The company’s fledgling sequential improvements and the return of former CEO Mike Ullman may have prompted Kyle Bass and a host of other fund managers to initiate long positions.

Bass is joined by Richard Perry of Perry Capital, Larry Robbins of Glenview Capital, George Soros of Soros Fund Management and Chuck Royce of Royce & Associates (typically a small-cap manager), who all initiated a position in J.C. Penney in recent months.

Mario Gabelli of GAMCO Investors and Steven Cohen of SAC Capital Advisors also increased their holdings of J.C. Penney during the second quarter.

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