J.C. Penney (JCP, Financial) faced a tumultuous 2013: Its turnaround plan failed to gain traction, its most prominent investor Bill Ackman (Trades, Portfolio) dropped his shareholding, and its stock price was depleted by 60%. Guru investors had varying takes on the complex situation and continue to as the company attempts to move forward.
Today, Jan. 8, the company issued a statement that was upbeat but lacking in detail:
“JCPenney reported today that the Company is pleased with its performance for the holiday period, showing continued progress in its turnaround efforts. Customers responded well to the Company's offerings this holiday shopping season, both in store and online.
JCPenney also reaffirmed its outlook for the fourth quarter of 2013, as previously set out in the Company's third quarter earnings release dated Nov. 20, 2013.”
The company’s fourth quarter outlook included: sequentially improved comparable store sales, higher gross margins, SG&A expenses down from the previous year, depreciation and amortization of approximately $165 million, unchanged interest expense, $175 million in capital expenditures, $2.85 billion in inventory and $2 billion in total available liquidity.
In the third quarter, depreciation and amortization expense was $161 million, merchandise inventory was $3.75 billion and total available liquidity was $1.71 billion.
Previously this year, J.C. Penney had been issuing monthly updates on its performance. The lack of hard numbers in the January release made some investors nervous and sent the stock down 8.79% on Tuesday, to $7.47 a share.Ă‚
No guru investors have yet reported taking a stake in J.C. Penney on today’s pullback. In the third quarter, however, the stock fell by approximately 48%, and several gurus initiated positions.
Kyle Bass (Trades, Portfolio) of Hayman Capital made the most notable, pouring 12.3% of his portfolio value into the company in acquiring 2.58% of its total share outstanding. At third quarter end, he held 5,687,516 shares.
Bass in October noted to CNBC that he welcomed the return of the company’s former CEO, Mike Ullman, but was in other ways disappointed with the company. He also did not indicate clearly whether he was going to sell his position:
“Most importantly, I think Ullman and his team will be able to stabilize… I’m not going to tell you what I’m going to do with our position, but I’ll just tell you that we are very disappointed with 38% dilution overnight and the fact that there was a severe miscommunication problem by management. So, I’m not investing in a turnaround. I think that they might be able to stabilize the decline. If they can stabilize the decline, their same-store sales comps were down so far year over year due to the prior CEO’s mismanagement, I think all they have to do is stabilize to see double-digit comp gains.”
But later, in December, announced on Bloomberg that while Hayman maintained a bond position in the company, he had disposed of his entire equity position in J.C. Penney: “What we got wrong on J.C. Penney was that it can be driven by perception and the vendors are much like depositors at banks. If you scare the vendors, and the vendors change terms, you’re going to need to raise more money. What we missed is how much more money the vendors were going to need, and hence that billion-dollar 38% dilutive equity offering that caught us off guard.”
In the second quarter, Richard Perry (Trades, Portfolio) of Perry Capital purchased 12 million shares of J.C. Penney. As the stock lost value in the third quarter he retained the majority of his position and sold only 2 million shares, ending the quarter with 2.2% of his portfolio value applied to the stock for a 4.54% equity stake, or 10 million shares, in J.C. Penney. The holding is too small to require mid-quarter reporting, making his fourth quarter position with the company unknown.
Another attention-grabbing entrant was David Tepper (Trades, Portfolio), who bought 737,800 shares of the company in the third quarter. But rather than a long-term investment, Tepper explained on Bloomberg that his dealing with J.C. Penney equated to a trade, and he no longer holds the shares:
“We’ll look at something and we’ll buy it at a price, and we’ll try to figure out what that thing is worth. And we’re more than willing to hold something for over a year. In fact, we like to hold longer than a year to get long-term gains. So if we buy Twitter (TWTR, Financial) wherever it came out there, and we set a level where we’re going to sell. If that level happens to happen in a year, we’ll wait a year. If that level happens to happen in a day and a half, it’s still gone. It’s a discipline.”
Paul Tudor Jones (Trades, Portfolio) and Whitney Tilson (Trades, Portfolio) were the two other managers who opened J.C. Penney positions in the third quarter, each under 40,000 shares.
Two other investors continue to hold massive stakes in J.C. Penney and remain confident in its turnaround prospects under current mnagement. George Soros (Trades, Portfolio) controls 9.07% of the company, which he purchased in the second quarter and did not change in the third quarter. It is his eighth largest portfolio holding. Soros in August supported the return on chief executive Ullman, pitting himself against Ackman and Richard Perry (Trades, Portfolio)’s Perry Capital LLC, who criticized management.
In supporting Ullman, Soros joined forces with Glenview Capital Management LLC, the other large guru stakeholder of J.C. Penney. Glenview Capital, led by Larry Robbins (Trades, Portfolio), top-performing hedge fund manager of 2013 according to Bloomberg, holds 12,370,487 shares of the company, after cutting its position of 20,060,830 shares held according to a filing as of Aug. 22. Prior to his reduction he was the company’s largest shareholder.
Pershing Square’s Bill Ackman (Trades, Portfolio), leader of the turnaround effort at J.C. Penney that caused such turbulence in its stock, sold out his entire company position at the end of August, losing about 50% of his investment.
He told shareholders in October: “We [sold out] because of a disagreement with the board about the timing and necessity for a CEO change at the Company, the valuation implied by the then stock price, and the risk of a successful turnaround.Turnarounds are inherently risky and require a totally aligned board of directors, a CEO with substantial turnaround experience, and the support and confidence of all stakeholders. Without all of these ingredients, we are bearish on J.C. Penney's prospects.”
J.C. Penney welcomed the return on its former CEO, Mike Ullman, on April 8, 2013, and also named him to the board of directors. Ullman served J.C. Penney for seven years and left the company in late 2011, several quarters after Ackman launched his campaign for change there. In the seven years leading to 2011, J.C. Penney’s stock gained approximately 24%.
In October, J.C. Penney reported positive same store sales for the first time since December 2011, with a 0.9% increase. It also announced sales at its website jcp.com grew 37.6% year over year, and conversion continued to improve, citing “favorable customer response to promotional events and improved inventory levels.” The good news continued in November, when the company reported 10.1% same-store sales increase over the previous year.
For the third quarter, the first full quarter under Ullman’s leadership, the company reported that sales results increased sequentially in each month of the quarter, with total sales of $2.78 billion, down from $2.93 billion in third quarter 2012. Comparable store sales were down 4.8%, with 710 basis point improvement sequentially. Its large gains occurred in Women’s apparel, men’s apparel and fine jewelry.
The company’s gross margin fell to 29.5% from 32.5% in the same periods, due to lower clearance margins in selling accumulated inventory from the first two quarters of the year, more clearance sales and a return to the company’s former promotional pricing strategy it used before the installation of Ackman’s CEO, Ron Johnson. Margins improved for each consecutive month during the quarter on a sequential basis.
At quarter end, J.C. Penney had access to $1.71 billion in cash, and had total debt of $5.612 billion. Its P/B ratio is 0.68 and P/S ratio is 0.16.
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