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Was Bill Ackman Wrong about JCP?

November 09, 2012 | About:

In May, Bill Ackman gave a presentation about why J.C. Penney (JCP) was one of his favorite value investments. Since that presentation, the stock is down 50%.

Today, the company reported earnings that were wildly disappointing.

"The net loss of $123 million, or 56 cents a share, in the three months ended Oct. 27 compares with a loss of $143 million, or 67 cents, a year earlier, the Plano, Texas-based company said today in a statement. Excluding restructuring and management- transition costs, the loss was 93 cents a share."

Most concerning is the fact that sales are falling at a rapid clip.

"The retailer’s third-quarter sales fell 27 percent to $2.93 billion, trailing analysts’ average estimate of $3.27 billion. Revenue declined by more than 20 percent in the first and second quarters. Same-store sales fell 26 percent in the third quarter, more than the 15 percent decline estimated by analysts surveyed by researcher Retail Metrics Inc."

Here is the core of Ackman's investment thesis:

Competitors have been winning, but J.C. Penney has advantages it can utilize. The company owns much of its real estate and has affordable leases for the rest. It has huge scale, attracts national brands and has the capacity to spend a lot of money on advertising.

Ackman thinks J.C. Penney stock could trade between $77 and $125 in 2014. He refers to J.C. Penney's sales per square foot in 2007, which he believes is a base case. That, combined with the cuts in expenses, would cause EPS of $6 in 2015. His upside case is an EPS of $9.25 in 2015. He feels downside is protected because of the leases and real estate controlled by the company, and the fact that the $900 million of cuts in expenses translates into about $2.50 in EPS alone.

Ackman strictly focused on the cost side of the equation and the upside of JCP's real estate holdings. The problem is that investors are focused on sales growth. The era of department stores may be screeching to a halt as consumers continue to flock to Amazon.com (AMZN) and other online retailers.

In addition, if JCP can't make any money using its vast real estate portfolio it suggests that the real estate values may not be as high as Ackman expects. With Best Buy (BBY) and Sears (SHLD) struggling, how many big box retailers would want to purchase JCP's real estate holdings?

Although it will take a few years for the JCP turnaround story to manifest, it appears as though Ackman misjudged the problems in the bricks and mortar retail industry as a whole.

Rating: 2.9/5 (9 votes)


Hardcorevalue - 4 years ago    Report SPAM
I think its probably too early to write off Johnson, Ackman and JCP.
Vgm - 4 years ago    Report SPAM
I think Ackman makes alot of poor strategic decisions and seems to imagine himself an effective activist. He's certainly not on my guru list, and not in the same league as his peers like Einhorn et al in my opinion.

I've said it before in another context, but he would do well to sit quietly in the corner a bit more and THINK.
Stevenramsey - 4 years ago    Report SPAM
The JCP presentation was enlightening to the fact that when space in the stores was converted to the "new jcp", the sales per square foot were much better than previously.

I would also say, from a valuation standpoint, that at there is about $60 per share of sales. Michael Price, who owns the stock, pointed out that JCP has $15 per share of real estate. If you back out the real estate, you're essentially pay $5 per share (November 10, 2012) for $60 per share of sales. Compare that to Macy's paying (sells at $38, for $65 per share of sales).

JCP is run by arguably the best retailer in the world and the conversion is showing real potential. They have a solid balance sheet also.

Low downside here, and huge upside is the way I see it.
Cdubey - 4 years ago    Report SPAM
Buying clothes on the internet is never going to catch up big time. Most people, including me, like to put the clothes on them and see how it looks. If given an option, people will visit a store and probably buy at a small premium if it lets them try the merchandise.

It is of course possible that people use the store as a place to try and then go back to buy the cloth on the internet, but this assumes that they were lucky enough to find a cloth they like on the internet and in the store. People who have been shopping for a while know that the chances of this happening is quite small.

In this vein, I don't find the comparison with Best Buy and Sears very apt.
Jk815 - 4 years ago    Report SPAM
I think people will always buy clothes from a store I know I will because you can have shirts, pants etc the same size on the tag but they fit differently.

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