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:
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.