GuruFocus Premium Membership

Serving Intelligent Investors since 2004. Only 96 cents a day.

Free Trial

Free 7-day Trial
All Articles and Columns »

JC Penney on Express Train to Oblivion

November 26, 2013 | About:
I was on CNBC this week to discuss battered retailer JC Penney (JCP), commenting that the company “is on an express train to oblivion.”

Activist investor Bill Ackman is widely blamed for running the company into the ground, and the criticism is justified. Ackman installed former Apple (AAPL) retail guru Ron Johnson as CEO, and in a span of less than two years, he managed to alienate (some might say actually antagonize) Penney’s core customer base and shrink the store’s annual revenues by a quarter.

But as destructive as Ackman was during his tenure as a major shareholder, he didn’t create Penney’s problems. Penney had been losing market share to nimbler retailers like Target (TGT), Wal-Mart (WMT)and Kohl’s (KSS) for years. In a strong retail market, a marginal player like Penney can survive and have some degree of success. But the retail market has been soft for years, particularly at Penney’s working and middle-class price points. Target, Wal-Mart and Kohl’s have all had disappointing years, and Wal-Mart has repeatedly mentioned the difficult financial conditions of its core working-class customers. If Wal-Mart is having a hard time growing, then what possible chance does Penney have of turning it around?

And this says nothing of the retail elephant in the room, internet retailer Amazon.com (AMZN) and its online peers. JC Penney has made decent progress online, as have most major retailers. But Amazon’s insistence on growth over profitability has a way of crimping the margins of virtually all its competitors.

JC Penney was slowly dying before Ackman got his claws into it. But at this stage in the game, the company will burn through its cash in less than a year unless sales show meaningful improvement. This brings up a good question: If Penney is dying, might it have value as an asset liquidation play?

Two years ago, I asked tongue in cheek if Sears was the next Berkshire Hathaway, noting that Eddie Lampert, the company chairman, was essentially doing what Warren Buffett did a generation ago: Turning a dying dinosaur into an investment holding company. Two year later, it seems that Lampert is carrying on as before, slowly selling off Sears’ valuable real estate while keeping the retail operations afloat, but just barely.

So, might JC Penney be a candidate for a similar strategy?

Well, yes, in theory. Except that Penney put its real estate up as collateral to Goldman Sachs (GS) in exchange for a lifeline loan earlier this year.

Don’t even think about buying Penney stock, even at current prices. In fact, you should use any end-of-year rally as an opportunity to short.

Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he was long DVA, MO and MSFT. Click here to receive his FREE 8-part investing series that will not only show you which sectors will soar, but also which stocks will deliver the highest returns. This series starts Nov. 5 and includes a FREE copy of his 2014 Macro Trend Profit Report.

About the author:

Charles Sizemore
Charles Lewis Sizemore, CFA is the Chief Investment Officer of Sizemore Capital Management. Please contact our offices today for a portfolio consultation.

Mr. Sizemore has been a repeat guest on Fox Business News, has been quoted in Barron’s Magazine and the Wall Street Journal, and has been published in many respected financial websites, including MarketWatch, TheStreet.com, InvestorPlace, MSN Money, Seeking Alpha, Stocks, Futures, and Options Magazine and The Daily Reckoning.

Visit Charles Sizemore's Website


Rating: 2.0/5 (10 votes)

Comments

The Science of Hitting
The Science of Hitting premium member - 11 months ago
"Don’t even think about buying Penney stock, even at current prices. In fact, you should use any end-of-year rally as an opportunity to short."

Just curious, are you short the stock?
arurao7
Arurao7 - 11 months ago
CEO Ulmann, bought close to 1 million worth of the stock. I think most big investors who recently purchased the stock are betting that the company will return to old JC Penney status before johnson took office. Just returning to old Penney status, will get the stock back to higher-teens/twenties.
Tannor
Tannor premium member - 11 months ago
The tone in the market seems it is almost 85%+ chance of bankruptcy in under two years, personally I think it is unlikely and would like to see a turnaround under progress before buying, although it will be obviously priced higher. The problem with turnarounds as Buffett notes is they rarely ever do just that, turnaround. The next year will be crucial from a cash burn and conversion/traffic standpoint.
20punches
20punches - 11 months ago
I'd be curious to see if you have any numbers to back up your thesis,especially this one: "But at this stage in the game, the company will burn through its cash in less than a year unless sales show meaningful improvement" Throughout the article you did not quote any single number.
cdubey
Cdubey - 11 months ago
I have never observed Mr Sizemore replying to any of the comments. One might observe that it will be fashionable to batter JCP for a while. Given that there is no data to back up the claims, this is an "opinion piece" rather than a serious investigation into business of JCP.
arurao7
Arurao7 - 11 months ago
Good things happen to a basket of cheap stocks. People were bearish of bestbuy, hewlett packard just like they are with JCP now. Nobody who invests in JCP is thinking of it as a wide moat company. It is a ciggar butt. All the negativity surrounding the stock is already priced in. Sizing a portion of investment into a basket of cheap stocks is not a bad idea. This is just one stock in that basket.

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK