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PENNEY (J C) CO JCP
June 07, 2012 - 11:37pm EST by
Reaper666
2012 2013
Price: 24.65 EPS $1.35 $2.39
Shares Out. (in M): 219 P/E 18.2x 10.3x
Market Cap (in $M): 5,388 P/FCF 0.0x 0.0x
Net Debt (in $M): 2,263 EBIT 670 1,021
TEV ($): 7,651 TEV/EBIT 11.4x 7.5x

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  • Retail
  • cost reduction
  • Strategy Change
  • Activists involved
 

Description

Bear Thesis & Current Market Consensus:

JC Penney (JCP) is a third-class department store, which is a segment in decline.  While not capable of great returns, JCP did have some earnings power, but now that has been jeopardized by new management’s foolish attempt to reinvent the company.  JCP’s elimination of discounting will not work and has done permanent damage to the brand.  The changes instituted by management are eerily similar to what Eddie Lampert introduced to Sears (SHLD), a strategy that has not worked.

 

Variant Perception:

What JCP is doing is not as revolutionary as investors think; most of the moves are just simple and easy cost cuts.  JCP’s switch to everyday low pricing from discounting does not hurt customer experience or value. This is very different than SHLD’s strategy of cutting store capex, which yielded unappealing stores.  JCP could reverse this policy if need be, with little damage.  JCP actually has significant competitive advantages, including an estimated $11 billion of replacement value in real estate.  The strategies being employed by the new management make sense, and the upside potential is huge.  At the current stock price, we need very little of the strategy to work, just an avoidance of a complete disaster.  Right now with none of the more positive aspects of management’s new plan implemented, JCP should be at its absolute low point, and the stock price seems to reflect that reality.

 

You can find both good arguments for both the bull & bear case online:

Bear Case: Though Davidowitz is a little loud, I think this is basically the bear thesis in a nutshell: http://finance.yahoo.com/blogs/daily-ticker/j-c-penney-sears-ron-johnson-done-incalculable-160736591.html

Bull Case: Bill Ackman gives a much fuller story than I have. Here is his Ira Sohn presentation: http://www.scribd.com/doc/94429025/AckmanJCP.

JCP itself gives extremely full presentations, which you can access on their website.

 

Management’s Plan & Valuation:

Essentially JCP’s plans are very simple: cut the costs of a company, which over its 110-year history has grown to 170k employees and has become very bloated.  I believe these are the type of cost cuts that, quite frankly, could be assumed to be nearly 100% doable if done by merger or a new management team.  However, since JCP has wrapped these cuts as part of its pitch to revolutionize the department store, investors perceive them as much more difficult then they appear to be.  If JCP had pitched its story as cost cuts and then emphasized the possible upside of the new design of the stores, the stock would likely be much higher today.  Instead, JCP hyped up the transformation of the store, leading off its analyst day presentation with a comparison to Apple stores, which caused the cost cuts appear secondary.  While this approach wowed investors at first, their patience has become limited even before the plan has been rolled out.

We put the cost cuts into 4 buckets: home office, store efficiency, cash wrap cut, and the change in promotional policy.  The first three are pure cost cuts achieved by simple blocking and tackling. Remember, this is a company where the average employee made 1,000 clicks on YouTube per month, and 20% of corporate internet bandwidth is used on Netflix. All it really takes to analyze JCP is a simple smell test; go into a JCP store, and ask yourself is this a model of ultimate efficiency?  Clearly not.  You could really look at any department store and recognize that, but JCP is actually the worst of the bunch.  The numbers clearly bear that out.  JCP has 40% more supervisors per store, and 15% more employees per store than competitors.  It is clear that there is a lot of room for improvement.  Below, Exhibit 1 presents our valuation for JCP, with just part of the planned cost cuts.  Given where the stock price is, this seems to be what the market is pricing in. 


Exhibit 1: JCP Valuation with partial cost cuts & no success from new sales practices
  Savings Planned ($m) % Achievable $ Achievable EPS
FY 2012 EPS       $1.25
Home Office 200 100% 200 $0.59
Store Efficiency 250 100% 250 $0.73
Cash Wrap Cut 100 100% 100 $0.29
Change in Discounting Practice 867.8 100% 867.8 $2.54
Total 1417.8 100.0% 1417.8 $5.40
Multiple       15.0
January 2015 Valuation       $81.07
Discount Rate 10%      
Discouted Valuation $62.68       

 

We think we are being extremely conservative in our estimates.  Often when companies set out cost-cutting programs like this, their results exceed their initial targets.  Additionally, the store efficiency number given by JCP actually excludes 400 smaller stores.  We also excluded $50 million of reduced costs from in-store costs (putting up sale signs) related to discounting practices from store efficiency and put that in place of the discounting practice.  Lastly, we used the already depressed FY2012 EPS.

The bearish answer to this is that JCP’s discounting policy has done irreversible damage to the company, making this analysis irrelevant.  We completely disagree.  If the policy does not work, JCP should be able to reverse course on the discounting policy with little or no long-term damage to the company.  After Macy’s (M) took over Marshall Field in August 2005, the company aggressively cut back on coupons, only to reverse the process.  M suffered no permanent damage from the policy shift.  It is quite logical to think that those customers, who go to JCP only when sent coupons or for supposed sales, would return when those come back.  In fact, one could make an argument that such customers may even spend more when the coupons return after a long disappearance.  We also could not think of a company that has gone out of business due to exorbitant pricing (note: this excludes companies which are forced to price highly because of a competitive disadvantage), with the exception of fraudulent companies. 

Now we can look at JCP, adopting the assumption that it gets 100% of the in-store efficiencies and the $50 million from in-store savings on discount preparation.

 

Exhibit 2: JCP Valaution with full store savings
  Value Added Total Value
Valuation with partial store savings (Exhibit 1)   $23.97
Value Uplift for 100% store savings $2.58 $26.55
Value uplift for $50 million savings in-store discounting $1.36 $27.91 

 

As you can see JCP already has some upside, just off of simple cost cuts and continuing to run at a suboptimal sales rate.  This analysis does not include the changes to inventory ($500+ million opportunity), supply chain, and capital allocation.

 

Further Upside:

We would first point out that JCP’s switch to everyday low pricing makes sense.  The practice seems to have served Wal-Mart (WMT) well, and it appears that coupon- and promotion-driven models have underperformed fixed-price format stores. 

In addition to the $300 million in decreased advertising spent mostly within the new everyday low pricing strategy, JCP has a real opportunity to increase sales.  JCP pays $4.00 / sq. ft, while non-anchor tenant mall competitors pay an average of $40 / sq. ft.  JCP is essentially going to attempt to arbitrage the difference.  Up till now, JCP was primarily focused on its private label, but now the idea is to adopt a store within a store model (goal is to go from 45% national brands today to 75%-80% by 2015).  JCP will be opening up to 100 stores within a store by 2015 in a partnership with outside vendors.  Basically JCP will almost become a mall itself but at rents 90% cheaper than its competitors.  Even JCP bears seem to think this concept makes sense.  JCP has already received interest from 110 vendors for this concept, with the first ten shops to be completed by year end 2012.  Not only do we believe the store within a store idea will improve sales through better product, but we think consumers will find the layout much more enticing.  JCP will then complement this approach with a town square in the middle of the store (the idea is to walk through the rest of the store to get there) with amenities like free ice cream in the summer.  The town square could be a strong draw and a clear differentiating factor in comparison with other competitors.  The bar is set pretty low; the department store experience is one of the worst in retail, and JCP’s sales / sq. ft. are barely above what they were in 2009, and under 10% above what the company earned in the mid-1990s.  Just a 10% improvement in sales would still bring JCP sales to 5% below where the company was at the 2007 peak, but 30% incremental margins would bring a dramatic difference to the bottom line.  If JCP were to regain an upward trajectory in same-store sales, then a higher terminal multiple (we will use 15) is likely.

 

Exhibit 3: JCP Valuation with the benefit of new sales practices
  Value Added Total Value
Valuation with full store savings (Exhibit 2)   $27.91
Value Uplift for Advertising reduction (reduced discounting) $8.15 $36.06
Value Uplift for 10% sales increase $14.08 $50.14
Value Uplift for increased terminal multiple (15x) $12.54 $62.68 

 

The amazing thing here is that we have not put in any heroic estimates, just simple cost cuts and an extremely modest rebound in sales. Within this paradigm, we get a current value that is 150% above today’s price, and a price in under 3 years that is more than triple today's mark.  With the elimination of JCP’s dividend, there should be some extra cash for JCP to allocate, which we did not factor in. 

If you look at the analyst day presentation and consider new CEO Ron Johnson’s vision for what JCP will be, it is easy to see an upside well above our estimates.  While we have not added value for Ron Johnson or Bill Ackman, it is easy to see a plus.  Ron Johnson clearly has merchandising expertise, which he demonstrated at Target (TGT), and he seems to have learned some design expertise while head of retail at Apple.  The management team that Johnson has assembled so far seems to be exceptional.  Ackman’s involvement should lead to an optimized capital structure, which could increase the upside once the turn-around is complete.

 

Point of Maximum Pessimism:

JCP has now done more than a round trip since Ron Johnson was named CEO (6/14/11).  Yet almost none of the plans Mr. Johnson has laid out have been implemented, with the exception of the switch in pricing strategy.  Customers now have the shock of the new pricing strategy but no additional reason to walk in or buy.  This is clearly the worst possible time for JCP, which may make it the best time to invest.  Clearly things have to get better from here.  In August, we will see the first few stores within a store, and 50% of product will represent new or revamped brands.  Being at the point of maximum pessimism should help us time our investment and allow for a better entry point.  The point of maximum pessimism combined with $11 billion in replacement cost for real estate and the fact that we only need some of the cost cuts to justify the current stock price, gives us our margin of safety.

 

Risks:

Switch to everyday low pricing may flop.

Management may lack the flexibility or the ability to change its plans, if they prove to be ineffective.

Management is planning on self-funding the transformation; if funds fall short, the cost of capital could be high.

The U.S. consumer may weaken, if the economy weakens.

Catalyst

Escaping the point of maximum pessimism (aka, no more bad news is good news).

New store within a store and 50% new product in August.

Cost cuts start to kick in throughout 2012.

Earnings and sales, turnaround follow the above.

Town Square concept is rolled out.

Short squeeze potential, 23.1% of the float is held short.

    sort by    

    Description

    Bear Thesis & Current Market Consensus:

    JC Penney (JCP) is a third-class department store, which is a segment in decline.  While not capable of great returns, JCP did have some earnings power, but now that has been jeopardized by new management’s foolish attempt to reinvent the company.  JCP’s elimination of discounting will not work and has done permanent damage to the brand.  The changes instituted by management are eerily similar to what Eddie Lampert introduced to Sears (SHLD), a strategy that has not worked.

     

    Variant Perception:

    What JCP is doing is not as revolutionary as investors think; most of the moves are just simple and easy cost cuts.  JCP’s switch to everyday low pricing from discounting does not hurt customer experience or value. This is very different than SHLD’s strategy of cutting store capex, which yielded unappealing stores.  JCP could reverse this policy if need be, with little damage.  JCP actually has significant competitive advantages, including an estimated $11 billion of replacement value in real estate.  The strategies being employed by the new management make sense, and the upside potential is huge.  At the current stock price, we need very little of the strategy to work, just an avoidance of a complete disaster.  Right now with none of the more positive aspects of management’s new plan implemented, JCP should be at its absolute low point, and the stock price seems to reflect that reality.

     

    You can find both good arguments for both the bull & bear case online:

    Bear Case: Though Davidowitz is a little loud, I think this is basically the bear thesis in a nutshell: http://finance.yahoo.com/blogs/daily-ticker/j-c-penney-sears-ron-johnson-done-incalculable-160736591.html

    Bull Case: Bill Ackman gives a much fuller story than I have. Here is his Ira Sohn presentation: http://www.scribd.com/doc/94429025/AckmanJCP.

    JCP itself gives extremely full presentations, which you can access on their website.

     

    Management’s Plan & Valuation:

    Essentially JCP’s plans are very simple: cut the costs of a company, which over its 110-year history has grown to 170k employees and has become very bloated.  I believe these are the type of cost cuts that, quite frankly, could be assumed to be nearly 100% doable if done by merger or a new management team.  However, since JCP has wrapped these cuts as part of its pitch to revolutionize the department store, investors perceive them as much more difficult then they appear to be.  If JCP had pitched its story as cost cuts and then emphasized the possible upside of the new design of the stores, the stock would likely be much higher today.  Instead, JCP hyped up the transformation of the store, leading off its analyst day presentation with a comparison to Apple stores, which caused the cost cuts appear secondary.  While this approach wowed investors at first, their patience has become limited even before the plan has been rolled out.

    We put the cost cuts into 4 buckets: home office, store efficiency, cash wrap cut, and the change in promotional policy.  The first three are pure cost cuts achieved by simple blocking and tackling. Remember, this is a company where the average employee made 1,000 clicks on YouTube per month, and 20% of corporate internet bandwidth is used on Netflix. All it really takes to analyze JCP is a simple smell test; go into a JCP store, and ask yourself is this a model of ultimate efficiency?  Clearly not.  You could really look at any department store and recognize that, but JCP is actually the worst of the bunch.  The numbers clearly bear that out.  JCP has 40% more supervisors per store, and 15% more employees per store than competitors.  It is clear that there is a lot of room for improvement.  Below, Exhibit 1 presents our valuation for JCP, with just part of the planned cost cuts.  Given where the stock price is, this seems to be what the market is pricing in. 


    Exhibit 1: JCP Valuation with partial cost cuts & no success from new sales practices
      Savings Planned ($m) % Achievable $ Achievable EPS
    FY 2012 EPS       $1.25
    Home Office 200 100% 200 $0.59
    Store Efficiency 250 100% 250 $0.73
    Cash Wrap Cut 100 100% 100 $0.29
    Change in Discounting Practice 867.8 100% 867.8 $2.54
    Total 1417.8 100.0% 1417.8 $5.40
    Multiple       15.0
    January 2015 Valuation       $81.07
    Discount Rate 10%      
    Discouted Valuation $62.68       

     

    We think we are being extremely conservative in our estimates.  Often when companies set out cost-cutting programs like this, their results exceed their initial targets.  Additionally, the store efficiency number given by JCP actually excludes 400 smaller stores.  We also excluded $50 million of reduced costs from in-store costs (putting up sale signs) related to discounting practices from store efficiency and put that in place of the discounting practice.  Lastly, we used the already depressed FY2012 EPS.

    The bearish answer to this is that JCP’s discounting policy has done irreversible damage to the company, making this analysis irrelevant.  We completely disagree.  If the policy does not work, JCP should be able to reverse course on the discounting policy with little or no long-term damage to the company.  After Macy’s (M) took over Marshall Field in August 2005, the company aggressively cut back on coupons, only to reverse the process.  M suffered no permanent damage from the policy shift.  It is quite logical to think that those customers, who go to JCP only when sent coupons or for supposed sales, would return when those come back.  In fact, one could make an argument that such customers may even spend more when the coupons return after a long disappearance.  We also could not think of a company that has gone out of business due to exorbitant pricing (note: this excludes companies which are forced to price highly because of a competitive disadvantage), with the exception of fraudulent companies. 

    Now we can look at JCP, adopting the assumption that it gets 100% of the in-store efficiencies and the $50 million from in-store savings on discount preparation.

     

    Exhibit 2: JCP Valaution with full store savings
      Value Added Total Value
    Valuation with partial store savings (Exhibit 1)   $23.97
    Value Uplift for 100% store savings $2.58 $26.55
    Value uplift for $50 million savings in-store discounting $1.36 $27.91 

     

    As you can see JCP already has some upside, just off of simple cost cuts and continuing to run at a suboptimal sales rate.  This analysis does not include the changes to inventory ($500+ million opportunity), supply chain, and capital allocation.

     

    Further Upside:

    We would first point out that JCP’s switch to everyday low pricing makes sense.  The practice seems to have served Wal-Mart (WMT) well, and it appears that coupon- and promotion-driven models have underperformed fixed-price format stores. 

    In addition to the $300 million in decreased advertising spent mostly within the new everyday low pricing strategy, JCP has a real opportunity to increase sales.  JCP pays $4.00 / sq. ft, while non-anchor tenant mall competitors pay an average of $40 / sq. ft.  JCP is essentially going to attempt to arbitrage the difference.  Up till now, JCP was primarily focused on its private label, but now the idea is to adopt a store within a store model (goal is to go from 45% national brands today to 75%-80% by 2015).  JCP will be opening up to 100 stores within a store by 2015 in a partnership with outside vendors.  Basically JCP will almost become a mall itself but at rents 90% cheaper than its competitors.  Even JCP bears seem to think this concept makes sense.  JCP has already received interest from 110 vendors for this concept, with the first ten shops to be completed by year end 2012.  Not only do we believe the store within a store idea will improve sales through better product, but we think consumers will find the layout much more enticing.  JCP will then complement this approach with a town square in the middle of the store (the idea is to walk through the rest of the store to get there) with amenities like free ice cream in the summer.  The town square could be a strong draw and a clear differentiating factor in comparison with other competitors.  The bar is set pretty low; the department store experience is one of the worst in retail, and JCP’s sales / sq. ft. are barely above what they were in 2009, and under 10% above what the company earned in the mid-1990s.  Just a 10% improvement in sales would still bring JCP sales to 5% below where the company was at the 2007 peak, but 30% incremental margins would bring a dramatic difference to the bottom line.  If JCP were to regain an upward trajectory in same-store sales, then a higher terminal multiple (we will use 15) is likely.

     

    Exhibit 3: JCP Valuation with the benefit of new sales practices
      Value Added Total Value
    Valuation with full store savings (Exhibit 2)   $27.91
    Value Uplift for Advertising reduction (reduced discounting) $8.15 $36.06
    Value Uplift for 10% sales increase $14.08 $50.14
    Value Uplift for increased terminal multiple (15x) $12.54 $62.68 

     

    The amazing thing here is that we have not put in any heroic estimates, just simple cost cuts and an extremely modest rebound in sales. Within this paradigm, we get a current value that is 150% above today’s price, and a price in under 3 years that is more than triple today's mark.  With the elimination of JCP’s dividend, there should be some extra cash for JCP to allocate, which we did not factor in. 

    If you look at the analyst day presentation and consider new CEO Ron Johnson’s vision for what JCP will be, it is easy to see an upside well above our estimates.  While we have not added value for Ron Johnson or Bill Ackman, it is easy to see a plus.  Ron Johnson clearly has merchandising expertise, which he demonstrated at Target (TGT), and he seems to have learned some design expertise while head of retail at Apple.  The management team that Johnson has assembled so far seems to be exceptional.  Ackman’s involvement should lead to an optimized capital structure, which could increase the upside once the turn-around is complete.

     

    Point of Maximum Pessimism:

    JCP has now done more than a round trip since Ron Johnson was named CEO (6/14/11).  Yet almost none of the plans Mr. Johnson has laid out have been implemented, with the exception of the switch in pricing strategy.  Customers now have the shock of the new pricing strategy but no additional reason to walk in or buy.  This is clearly the worst possible time for JCP, which may make it the best time to invest.  Clearly things have to get better from here.  In August, we will see the first few stores within a store, and 50% of product will represent new or revamped brands.  Being at the point of maximum pessimism should help us time our investment and allow for a better entry point.  The point of maximum pessimism combined with $11 billion in replacement cost for real estate and the fact that we only need some of the cost cuts to justify the current stock price, gives us our margin of safety.

     

    Risks:

    Switch to everyday low pricing may flop.

    Management may lack the flexibility or the ability to change its plans, if they prove to be ineffective.

    Management is planning on self-funding the transformation; if funds fall short, the cost of capital could be high.

    The U.S. consumer may weaken, if the economy weakens.

    Catalyst

    Escaping the point of maximum pessimism (aka, no more bad news is good news).

    New store within a store and 50% new product in August.

    Cost cuts start to kick in throughout 2012.

    Earnings and sales, turnaround follow the above.

    Town Square concept is rolled out.

    Short squeeze potential, 23.1% of the float is held short.

    Messages

    SubjectRE: RE: The bear case
    Entry06/08/2012 11:16 AM
    MemberReaper666
    Thanks for the comments, let me see if I can address all your questions:
     
    Real estate is replacement cost, do I think they could get that now almost definitely not but that is what I think store within a store is all about, arbitraging that difference between $40 an SF vs. $4.  Real estate is only a part of what I belive gives a margin of safety.
     
    The economy: It's a risk but that is a risk for almost every company, conversely things could get better.  I don't think JCP is more exposed than most but it is possible there would be funding issues if things get bad enough.
     
    Comparison to WMT: Sorry if I phrased this poorly.  I didn't mean to say JCP is WMT, just that promotional discounting seems to be correlated to poor businesses and every day low prices to better ones.
     
    Valuation:  15x is high now, but this scenario would be if all JCP's changes work and sales are growing again.  At that point (if we get there) my guess is 15x will be low.
     
    Ron Johnson:  I'm not buying because of him, but a combination of the plan he laid out and the valuation. I look at him as a plus, I am not paying for.
     
    Entry point:  Obviously I would like to buy JCP a little cheaper, but I think the point of maximum pessimism I discussed, gives a good entry point for a position.  I think if it falls to that $18 level, it's back up the truck time.
    SubjectRE & costs
    Entry06/08/2012 11:40 AM
    MemberAggie1111
    Thank you for the write-up. JCP is sure to be a battleground stock over the next few years and I am excited to watch it play out. While I have not been in a store, I am impressed with what they now offer online
     
    1) RE - Like the other members, some clarity on the $11Bln in replacement value would be helpful.  Is there a cap rate valuation to lend an average? I find that replacement value is only good if the type of real estate (big box) has demand to fill it.
     
    2) Can you go into further explanation on the pricing strategy? How are they going after every day low prices? From sources I have talked to they are asking for discounts back from the merchants, but over time I have found that this results in pass-through inflation.  I don't understand how a company can immediately offer everyday low prices without first doing the work to achieve everday low costs on their end.  KMART tried to implement everday low prices without starting with everyday low costs and the result was not desirable.
     
    Many thanks
    SubjectFurther clarification on comments & Questions
    Entry06/08/2012 01:08 PM
    MemberReaper666
    Real Estate:  I do not think this is liquid value, but as I said replacement cost. I am sure some these real estate assets could be monetized but I have not done the work as to which ones. This is not a story where they have a glaring asset like a Manhattan store, but I'm sure there is demand for some of their portfolio.  However, I am not looking for any real estate sales rather I believe the real estate will be monetized by exploiting the asset through the store with a store program.  If this fails then my guess is we could see some asset sales, but it is very premature to discuss that.
     
    Pricing Policy: The policy is not to be a price leader, the policy is to replace all the coupons and promotions with the same price you get after all that.  Basically before they price a shirt @ $50 less 50% so $25.  Now they just say $25.
     
    Valuation: If JCP is growing SSS @ say 6%, which leads to net income growth in the teens, the stores look very good, they are buying back shares and now Johnson looks like a genius, I think 15x just not sound outrageous.  You are of course free to disagree.
    SubjectRE: Further clarification on comments & Questions
    Entry06/08/2012 04:09 PM
    MemberReaper666
    In the Analyst day presentation, JCP states that only 0.2% of sales were at full price and 1.1% at a 20% discount more than 72% was done at a discount of 50% or more, so I don't think this is going to be a problem.
    SubjectStrategy examples - empirical evidence?
    Entry06/10/2012 07:31 PM
    Memberrjm59
    How did they come up with this store within a store strategy, what examples are there where it's worked before or what empirical evidence do they have to base it on or is it just by feel?  Seems amazing to me that they wouldn't test it out on some small sample of stores first to see if it works instead of immediately diving in with the whole store base??  
    SubjectRE: Strategy examples - empirical evidence?
    Entry06/11/2012 09:52 AM
    MemberReaper666
    They do have some store within a store now with Sephora which has been a big success and for a while department stores have had whole sections dedicated to brands.  So I don't think this comes out of nowhere, but they don't have a test store where all this was done.
    SubjectRE: mall dynamics
    Entry06/11/2012 04:06 PM
    MemberReaper666
    I'm sure if this results in lower rents for specialty stores it will tick off the mall owners, but I don't think they have much recourse.  There are not too many viable tenants to replace JCP and it really looks bad to have no anchor tenant.  I also think this town square concept could be really cool and potentially increase mall traffic overall.  Now if the strategy works so well that new entrants can come in and copy it and thus force a rent increase, that is years away and a nice problem to have.
    SubjectOf Coupons and Wal-Mart
    Entry06/12/2012 09:38 AM
    Membercnm3d
    The main issue is... there is a reason fashion retailers coupon. It gets people in the store. Shopping is a social outting for many women, so if they have a coupon, it gives them a reason to go in and look around. It's not just the price point that attracts them.
     
    And on Wal-Mart, the only area in which Wal-Mart doesn't crush it is home and apparel. So if EDLP has never worked in those two categories for THE best EDLP company in the world, why would it work for a third tier department store?
     
    Not saying whether it's a long or a short (no real opinion), but I highly doubt the new strategy works.
    SubjectRE: Of Coupons and Wal-Mart
    Entry06/12/2012 04:07 PM
    MemberReaper666
    Fair points.
    First off you don't need the EDLP strategy to work for this to work, that just makes it a home run but just the other cost cuts as I lay out in my report gives you some upside at current prices. Also I belive that they will still have sales just on the same days so they get the same Pavlov response without the expense of sending out promotions.  I think the better layout, more branded product and town Square will also be big draws to get people into stores
     
    On Wal-Mart not working for apparel, WMT is not a fashion company and consumers do not view them as one.  I think that is the source of the failure here not the pricing strategy.  People simply don't want to say they bought their clothes at WMT.
    SubjectRE: RE: RE: mall dynamics
    Entry06/13/2012 10:08 AM
    MemberReaper666
    Good point on the cost of capital, but here is the great thing, I can agree with you and still be very bullish on JCP.  JCP's book value is over $18 per share, so if they earned their cost of capital we shouldn't pay much more than that.  But this real estate has been sitting on the books for decades and decades, so it we wrote it up to market or replacement value we would get a book value that far exceeds the stock price.
     
    Additionally I am not so sure how immitigable JCP's strategy will be, they are going to have 100 stores within a store.  I doubt it will make much sense for a brand to leave JCP to go down the mall where the other store has 0 stores, this also may be a contract issue.  So if M or anybody else copies them, they likely are choosing from brands mostly outside of the top 100 choices.  If the strategy is not fully replicable, it puts the mall owners in a much weaker bargaining position, essentially they allow JCP to arbitrage them or likely have an empty anchor, no rent and the rest of the mall really take a hit.
    SubjectRE: RE: RE: RE: mall dynamics
    Entry06/13/2012 01:01 PM
    MemberReaper666
    I think if $20 is the floor that is pretty good downside protection and great risk/ reward.
     
    My guess is the Martha Stewart deal is a one-off.  They plan on having in-house designers kind of like a genius bar for the home, this is their biggest effort.  The other brands should simply be attracted by the sales potential, as well as the real estate arbitrage.
    SubjectMichael Francis
    Entry06/18/2012 05:00 PM
    Memberrfmedallion85
    Any thoughts on the departure? 
    SubjectRE: Michael Francis
    Entry06/19/2012 09:58 AM
    MemberReaper666
    I think when things don't go well people lose their jobs.  Johnson brought in a lot of people so one person does not determine the fate of JCP.  This could be an indication that the current quarter isn't going well, but I really don't see any long-term change here.  Maybe they should have waited till the stores were changed to change the pricing strategy but they didn't.  Right now they seem to be focusing on clarifying their pricing message and not reversing their strategy.  I see little change here for long-term holders so I think this is a buying opportunity. However, I would acknowledge that this does elevate the chances of the pricing strategy not working but as I have said already it is really too soon to tell, mitigating this would be that they are more likely to reverse the pricing strategy if it doesn't work (placing the blame on Francis).
    SubjectRE: RE: Michael Francis
    Entry06/19/2012 11:17 AM
    MemberWinBrun
    Reaper-I apologize if you have already covered this (I didn't read the whole thread), but what was the rationale for changing the pricing strategy in one fell swoop rather than slowly rolling it out in different test markets? Hindsight is 20/20, but it seems like it may have been more prudent to ween the patient of the coupon dependence in more measured doses rather than go cold turkey.  
     
    Appreciate your thoughts.  
    SubjectRE: RE: RE: Michael Francis
    Entry06/19/2012 12:48 PM
    MemberReaper666
    Very interesting question WinBrun, but I'm sorry I don't have the answer.  I don't think the company really said what the rational of all at once or a gradual price change.  My guess is that this dovetailed well with their other cost cuts, so as they made cuts they would have a little less work in putting together sale displays.  Maybe they wanted to get away from the discounting image before they introduced the new store. 
    SubjectCapital Raise?
    Entry06/19/2012 02:25 PM
    Membercuyler1903
    As much money as JCP is spending in capex and how how much runway do they have before they have to issue equity?  With $3.1bn of gross debt already outstanding and negative OCF, seems company could be forced to move down the capital structure to fund this turnaround...
     
    As I mentioned back in post 7, the core problem here is that you have a sales & marketing guy in charge who has never had P&L responsibility before in his life, and doesn't know the first thing about coverage ratios, bank groups and bond indentures.  This has a way of turning into a big problem in a big hurry.
     
    With TBV at $18/share, I could see this thing easily going to the mid teens, especially if the market starts smelling an equity offering....
     
    Cuyler
    SubjectRE: Capital Raise?
    Entry06/19/2012 02:32 PM
    Memberzzz007
    But probably not before the Ringling Brothers duo of Ackman and Tilson pump it hard and fast on CNBC. 
    SubjectRE: RE: Capital Raise?
    Entry06/19/2012 02:55 PM
    Membercuyler1903
    Don't forget Johnson himself.  Just out: "JC Penney 'Pleased' With May Sales, CEO says - WSJ" - like clockwork.
    SubjectRE: RE: RE: Capital Raise?
    Entry06/19/2012 03:11 PM
    Memberzzz007
    Yes, the same way I am "pleased" when my wife takes a night off from abusing me.
    SubjectRE: RE: RE: RE: Capital Raise?
    Entry06/19/2012 04:42 PM
    MemberReaper666
    The company cut the dividend and like I said I think this starts to turn around as they build this out.  I think the dividend cut was in essence the equity raise.
     
    There is a lot more flexibility than you think here, JCP could slow the restructuring program just a little to pay for this, could potentially work out some funding from the store within a store partners, could have Ackman directly invest (an equity raise but maybe not at a distressed price), I also just checked the bond prices they have a 2018 bond yielding under 7%, and I think yields will drop as operations improve.
    SubjectTransition to Younger customers
    Entry06/20/2012 02:29 PM
    MemberReaper666
    This is something I didn't really discuss in my report but the new store format and pricing is partly a strategy to attract new and primarily younger customers.  For years the average department store customer has gotten older, essentially the concept is not attracting many new customers while their existing base ages.  The new format should attract a younger more affluent group not just older discount customers.  So you are correct in assuming some customers will be turned off permanently by the new pricing strategy.  However, new customers will come, they haven't yet because the store hasn't changed.  I believe once the store transformation is complete, the net change in customers will be positive.
     
    Here is a clip of a bullish Morningstar Analyst who touches briefly on the above concept. 
     
    http://finance.yahoo.com/blogs/daily-ticker/believe-not-jc-penney-strategy-working-says-analyst-172735462.html
     
    SubjectRE: Transition to Younger customers
    Entry06/20/2012 02:41 PM
    MemberSpocksBrainX
    You said:  "For years the average department store customer has gotten older, essentially the concept is not attracting many new customers while their existing base ages."
     
    just curious, is this just opinion or do you have some supporting rationale for it?  From my view, small though it is, the department stores appear to be taking share from many speciality retailers, not losing it.  Course, that could limited to older women apparel but home appears to be very healthy and if you include all the comps from these guys and all the new stores from KSS I just wonder if the above is a tired old truism you heard 15 years ago (I certainly did)?   I'm not sure how you could prove it.   
    SubjectRE: RE: Transition to Younger customers
    Entry06/20/2012 03:59 PM
    MemberReaper666
    I have seen various reports that state this.  While the downward trend has slowed it has not gone away.
     
    Here is a quick link:
    http://business.highbeam.com/industry-reports/retail/department-stores
    SubjectRE: RE: RE: Transition to Younger customers
    Entry06/20/2012 04:44 PM
    MemberSpocksBrainX
    I don't have access....still, the comment sounds completely off-base to me, or I'd like to see a very detailed look at how they came to those conclusions (and even then the data could be completely off-base).  In essence, it would mean somebody like KSS imported martians to shop their stores or all the old folks just shifted addresses (which might have happened).  I don't think this is so, and if you include TJX and Marshalls and Ross as department stores - which they surely are in the traditional sense of the word, as they look and feel like stores with departments with all the traditional lines you see in these others - then the segment is clearly viabrant and healthy. 
     
    Course, doesn't mean everybody is. 
     
    Not that this means anything of course either. 
    SubjectRE: Transition to Younger customers
    Entry06/20/2012 04:47 PM
    MemberSpocksBrainX
    minor thing, and I apologize, but if all those JCP stores are in malls and given that malls are populated mostly by roving 15 to 25 year kids, then surely getting younger people in their stores is pretty critical for them.   So I'm making a rather stupid point that doesn't need to made.   I just think location is more important than definition here, but that is an obvious thing so...
    SubjectRE: RE: Transition to Younger customers
    Entry06/20/2012 05:44 PM
    MemberReaper666
    I'm comfortable with the date I have seen.  I would say walk into a store, not scientific but it doesn't exactly look like spring break.
    SubjectRE: RE: Transition to Younger customers
    Entry06/25/2012 09:38 AM
    Memberroark304
    So the critical point in my mind then is that JCP's sales and operating profitability in say 2015 will be driven by the existing customers of future vendors as much (if not more) than any other factor and hence looking to the rearview and/or present customer composition to divine future sales trends seems like a mistake. Just thinking out loud here so would love anyone's thoughts... 
     
    This seems fine so long as you add "if its strategy works incredibly well" in there somewhere.  You are basically presenting the limit of the so called occupancy arbitrage opportunity.  But I don't think it's fair to assume JCP's sales will entirely or primarily or mostly hinge on the sales of its store within a store brand names just because it's trying this strategy.  It might.  But there are potential wedges:
     
    (1) The brand names it attracts will almost surely reflect a wide spectrum a quality.  It isn't likely to open mini-URBNs, for example, at a bunch of its B- locations.  Strong brands may have a big unique component to their s/psf, but location still matters.  It is asking for too much to turn a JCP doing $85 psf in a mall doing $225 psf into a Bloomingdales (with DKNY, BCBG, Luis Vuitton, etc).  At some point down the quality continuum, the "existing customers of future vendors" starts to sound kind of funny, like making Kohl's or Target's underlying productivity subordinate to Vera Wang or Child of Mine.  In most realistic cases, JCP will still rely in substantial part of whatever you can call its underlying productivity at a large number of its stores.
     
    (2) When you stick a Hershey bar in a Clark bar wrapper, is it not always clear whose "existing customers" determine the demand curve.  How many sales psf does a lululemon do if you plant it smack in the heart of even a well-located Burlington Coat Factory (reality show idea bubbling up)?  At the limit, this can seem tautological, if you see JCP as trying to turn its wrapper in a Hershey label by finding enough good vendors and changing its price image.  But most outcomes are somewhere in between abject failure and complete transformation.  JCP is a brand that's probably pretty ingrained in a lot of psyches.  Ingrained mostly as "a place where cheap aunts can buy each other gifts they will later return."  To a meaningful extent, even the better vendors it attracts may see their unique productivity somehow shared with JCP's underlying productivity.
     
    (3)  The size of the stores will also play a role in productivity sharing.  Even Nordstrom's sits at $400 or so s/psf in malls that do a lot more in specialty spaces.  In some cases, this admittedly won't matter, where the vendors they attract already mostly occupy spaces in larger stores.  But for many of the more exciting potential vendors, you could imagine a gap between their small-location productivity and what they would experience at a 110K sqft anchor.  Again, there is a limit of this strategy where JCP manages to roughly become a B+ or A-mall itself and slices through the small/big disparity.  But even in anchors like Macy's and Bloomingdales with a lot of store-within-a-store success, anything short of this limit seems to fall somewhere in between.      
     
    A lot of these wedges lend reason to JCP's high risk strategy.  If a part of the anchor arbitrage game is about cooperation externalities -- smaller stores have trouble coming together and creating an instant network so they pay for anchors taking the inital traffic risk -- then the way to attack these wedges might be an all-or-nothing approach; i.e. as if they were forming a specialty store co-op.  It might be much harder to attract vendors to enter the game and take the branding risk if it isn't part of a big plan to change the not-so-hot wrapping paper.  But that doesn't mean the results are likely to be all or nothing.  It's easy to imagine middle ground.        
     
            
    SubjectRE: RE: RE: RE: Transition to Younger customers
    Entry06/25/2012 03:09 PM
    MemberReaper666
    AAOI, I think we are of the same mindset, I'm also hoping for a little bit more of downside and to backup the truck then.  But a quick FYI on the LEAPS the vol appears expensive, so I think I may have to stick with buying shares, in order to maintain a margin of safety.  The LEAPS would still be cheap in that I think the chances of the strategy working vs. the odds baked in by the options price, but I think the strategy has to work fairly well for there to be upside vs. the stock which doesn't even price in the cost cuts.
    SubjectI wonder how much JCP is making on these at $17?
    Entry08/03/2012 01:54 PM
    Membercuyler1903
    SubjectRE: Update?
    Entry11/14/2012 04:27 PM
    MemberReaper666
    I still have to sit down and go through it.  Topline numbers were horrible, much worse than I thought but some rays of hope from store in a store. Looks like story is intact but risk is higher as old stores detiration is increasing not subsiding as I expected.  I do think the company could rachet back up the discounts if needed and I think they are looking for diffrent ways to do that.  So I don't think it's terminal
    SubjectRE: RE: Update?
    Entry11/14/2012 04:28 PM
    MemberReaper666
    I'll give a further update once I fully go thorugh it.
     
    SubjectRE: RE: Update?
    Entry11/25/2012 04:14 PM
    MemberReaper666
    Though results are bad to horrible, I don't disagree at all with what management has said or done.  The worse comp (sequentially) is explained by the elimination of month long value.  I think 1Q you will start to see a positive comp as the comparison gets easier and store in a store continues it's rollout.  Store within a store is so far very encouraging though results are limited.  I think the changes they are making like showing the suggested retail price make sense.  So far everything has gone as bad as possible on the elimination of discounting, it can only get better from here, so something they do may work and that I don't think the market is expecting that.  
     
    I made this a small position slightly after my write-up at a little below $22.  I expect to increase that significantly soon.  I would say risk has increased since results have been worse than expected and the chances of a secondary are higher but I think Ackman will back it and I think the stock could rebound with better results making it less dilutive.
    SubjectRE: Real estate
    Entry11/25/2012 04:20 PM
    MemberReaper666
    I think for the first time ever JCP pointed out the potential real estate value.  However, this is only the value if one can capitalize on it and basically convert it into mall real estate.  That is what store within a sore is all about.  If that fails I am sure there is some value in the real estate, I use a $100/ sq. ft, in my writeup even if it's $75 that gives them some wiggle room and upside.  The situation would be in distress some of the properties have real value, some do not, similar to most retailers.
    SubjectRE: Bonds
    Entry11/27/2012 11:22 AM
    MemberReaper666
    I think the bonds make a lot of sense. Debt holders arguably have two levels of protection, the company could backtrack on discounts, reversing the recent damage.  If that fails or does not happen, all you need is about 10% of JCP's real estate to be valued in-line with mall real estate with the rest being worthless for the bondholders to me made whole.
    SubjectRE: Hard to believe JCP not making money...
    Entry02/27/2013 05:31 PM
    Memberrasputin998
    Pink shirt and pink and purple plaid bowtie ensemble really rounds the outfit out.
    SubjectRE: Hard to believe JCP not making money...
    Entry02/27/2013 09:24 PM
    Memberoogum858
    oooh that suit is "imported" . . . fancy.  
    SubjectRE: RE: RE: RE: Debt
    Entry02/28/2013 05:30 PM
    Memberaagold
    How can the on-mall real estate be owned?  Don't all stores in a mall rent their space from the mall owners?
    SubjectRE: RE: RE: RE: RE: RE: Debt
    Entry03/01/2013 07:06 PM
    Membereigenvalue
    It is very common for an anchor tenant to have a special deal with the developer of a strip mall where the anchor owns its "pad" in fee-simple. Things can get more complicated if the other in-line tenants have co-tenancy clauses that reference JCP in their leases. (Source: I used to be a commercial real estate mortgage broker.)
    SubjectRE: RE: RE: RE: RE: RE: RE: Debt
    Entry03/02/2013 09:57 AM
    Memberaagold
    I believe JCP is mainly in enclosed malls, not strip malls.  Does what you wrote still apply?
    And if it did, wouldn't it have to be another large department store that bought the property?  The only other way I could see it work is if the store were converted into being more mall space divided up into fully enclosed specialty stores.  But has this ever been done before?  I've never heard of it.
     
    It seems to me that, given the enormous sales declines (31.7%!) that have occurred, JCP will have to close a large number of underperforming stores and focus on the better performing ones.  Otherwise the fixed cost percentage is too high.  And my guess is they will take large writeoffs as this happens rather than recording gains-on-sale.
     
    I was long JCP until they reported Q4 results, and I may get back in later if things stabilize and the stock looks very undervalued, but Q4 was so bad I no longer believe that Ackman's ~$70/share fair value analysis (Ira Sohn presentation) is realistic.  I was never too confident in the strategy of eliminating sales and coupons, but I figured they could always bring them back if it didn't work out.  But what really concerns me is that they've been trying to bring back promotions of various types for a while now yet sales keep declining even faster, and it's now at the point where they absolutely need to bring back at least some percentage of the core customer traffic they've lost.  It's obvious now that Ron Johnson's decision not to test the changes in selected markets first before applying them to the whole chain was disastrous.  He certainly was bold, but a 31.7% same-store sales decline is really too much to withstand.  Hopefully their reintroduction of weekly sales will recover some of the lost customer traffic.
     
     
    SubjectRE: RE Value
    Entry08/01/2013 07:17 PM
    Memberaagold
    Hmmm.... that's interesting.  According to that presentation, the Cushman & Wakefield appraisal is about $4B for the real estate.  So why did Ackman say it was worth at least $11B in this presentation on Page 59?
     
     
    - aagold
    SubjectRE: RE: RE: RE: RE: cash flow
    Entry08/22/2013 07:15 AM
    Membertyler939
    Curious as to your thoughts on what manner the financing will take.  Any thoughts as to equity offering vs. convertible vs. rights offering?  Getting the price up to $18 or $20 seems like a big if when everyone knows they need more capital.
    SubjectRE: RE: RE: RE: RE: cash flow
    Entry08/22/2013 03:50 PM
    Memberbaileyb906
    I think the longs are generally fast money playing for a squeeze and generalist long only and hedge fund turnaround/value types who aren't retail specialists.  Who incidentally were the same people who followed Ackman into this.  You also have a bunch of credit focused and macro focused (Kyle Bass) folks wading in.  Remember what happened when Paulson started picking stocks after his epic macro winning bet?  Not good.  I know some people who know retail who are long this for a squeeze on the optics of better comps.  But I don't know a single retail specialist who is long this as a true believer.
     
    BTW this company can have comps turn positive and still hit the wall.  Everyone focused on comps but that is a red herring - its fate rests on an improvement in gross margin.  Which is part selling margin and part occupancy leverage.  They can't get the occupancy leverage back fast enough - thus selling margin must fire on all cylinders.
     
     
    SubjectRE: RE: RE: RE: RE: RE: cash flow
    Entry08/22/2013 04:01 PM
    Membercnm3d
    you know, it's funny. i don't know a single consumer guy who is long it except for a trade. (i'm like 65% consumer, fyi.)
     
    another stock that i think sets up like that is COH. i was at an idea lunch earlier this year, bull vs bear on the stock. every long was a generalist and every short was a consumer specialist. 
     
    the "set up" is a much talked about, generally useless term. but i do find it interesting observing who is long a stock, who is short, and what that can tell you about how to trade.
    SubjectRE: RE: RE: RE: RE: RE: RE: cash flow
    Entry08/23/2013 01:15 PM
    Memberbaileyb906
    A fantastic post from MJW - agree 100%.  If there was a "like" button, I would hit it!  
     
    It amazes how much people fall for talk which as you point out is cheap.  And how people put faith in the sellside forecasting a second half comp turn - they did the exact same thing last year and were completely wrong.  As for last year's half truths, they were ridiculous examples of the release of inside but non-material information.  They were specifically designed to hook in people who aren't retail experts.  So the same brand with the same SQF is up 40% yoy.  Yeah, you can do that by improving product.  You can also do that by moving the product from second floor in the back to first floor in the front.  So releasing micro-points without full context lends room for all sorts of misleading.
     
    Apologies for gettting the occupancy in the GM line versus SGA line wrong - I got confused.  I wish companies would standardize this.
     
    Maybe they can get back to 38%ish in 2014 with a product fix...I doubt they get anywhere near there in 2H of this year.  They kept talking about how they are too light in the right merchandise (like St John's Bay) but they had DSI +18 and had inventory outgrow sales by 17%...much worse than the prior 4 quarters in which it was up 4-9%.  I see a big inventory flush of ill-fated RJ era inventory in Q3, which will further hurt EBITDA and their cash position.  Because inventory is heavy despite being light in the right stuff...gotta get rid of the excess.  Just look on their website and you will see it - you don't even have to leave your desk!
    SubjectRE: RE: RE: RE: RE: RE: RE: RE: RE: RE: cash flow
    Entry08/23/2013 01:20 PM
    Memberbaileyb906
    it is ALREADY at a 4.5 bn run rate...it's not at a 4.2bn run rate - 4.2 is if you annualize 1H but Q4 SGA is ALWAYS higher - more advertising, more part-time peak staff, and if they do better, bonuses - you need to bump 4.5 to 4.8 (at least) in a partial sales recovery scenario
    SubjectRE: RE: RE: RE: RE: RE: RE: RE: RE: RE: cash flow
    Entry08/23/2013 01:28 PM
    Memberbaileyb906
    Here is my version of your sales recovery scenario.  
     
    6.26 GP
    less 4.8 bn SGA = 1460 OP (altho I think SGA goes higher)
    400 mm interest
    500 mm normalized capex (they can do 300 for a year or two but normalized is more like 500-600 or else you become Sears, your stores look like crap, and you negatively comp forever)
    so 560 in FCF not 1060
    which is $2.50 on the current share base BUT
    if they need to raise $1 bn to get there, that's 77 mm shares at the current quote (could very well be done lower - altho maybe they get a squeeze and can take advantage of discounting to a squeeze price)
    new cash flow per share is $1.88
     
    so maybe if everything goes right, it's worth $19
     
    if everything goes wrong, it's worth $0
     
    from here that is $6 up to $13 down
     
    wild cards are of course multiple, speed of recovery, if and where they raise a secondary, etc.
     
    don't forget that the low-mid tier consumer is weakening and in pretty rough share - see WMT, TGT, ARO, MCD, regional gaming, etc.
     
    and M is lowering opening price points for holiday
    SubjectNew filings
    Entry09/04/2013 09:58 AM
    Memberscott265
    Anyone know what any of the recent filers (Glenview, Soros, Hayman) are thinking on this? Clealy all smart investors so just wondering if there is anything beyond just a high level ]bet on a return of sales and/or margins. 
    SubjectConsensus on capital raise?
    Entry09/04/2013 12:34 PM
    Membertyler939
    I am very curious as to what the board consensus is regarding the likelihood of an imminent capital raise.  Does anyone feel strongly that it happens in the next two months (either yes or no)?  Any responses greatly appreciated.
    SubjectRE: RE: RE: Consensus on capital raise?
    Entry09/25/2013 10:59 AM
    Membertyler939
    Given today's speculation, I would really love to hear people's thoughts on the likelihood and timing of an equity raise.  My own thoughts are some sort of debt raise seems imminent, but an equity raise by end of first quarter seems likely.  Am I nuts (about this prediction, not generally)? 
    SubjectRE: Goldman
    Entry09/26/2013 06:04 PM
    Memberaagold
    Why on earth would JCP give Goldman this business after they caused so much damage?  Can it be that research really is separated from investment banking and they're willing to risk their investment banking fees in order to give their clients honest research?  Unless I'm totally misunderstanding what happened here, I'm actually pretty impressed with Goldman's ethics here, but am also surprised that JCP didn't punish them.
     
    - aagold
    SubjectRE: RE: Goldman
    Entry09/26/2013 06:18 PM
    Memberlpartners
    Its likely Goldamn locked them up on as the exclusive underwriter for future financings when they did the debt deal. With possible impending covenant breaches, they may also be forcing JCP to issue equity. They'll make money from the stock short, their debt holdings will improve in price post equity issuance plus they will get underwriting fees. Someone's buying a bigger house in the Hamptons!
    SubjectRE: RE: RE: RE: Goldman
    Entry09/27/2013 08:45 AM
    Memberscott265
    I still don't get who is buying these JCP offerings.
     
    1. The company's estimate of year end liquidity went from 1.5B to 1.3B (prior to offering) 200mm from 8/20 to this morning's press release.  Things have continued to be awful.
    2.  Who cares about a positive comp? This thing could comp low single digits positive for years and still go under.   They are doing 12B in sales and need to get back to probably closer to 17B for the equity to be fairly valued.
    3. Short squeeze story is gone now with all the new shares. 
    4.  Beyond all the shenanigans of the last day they let Ackman and Roth beat them out the door and get a last laugh (to the extent they can on this one.)
     
    I just wish someone would make a cogent numbers based case for why people are buying this offering beyond short squeeze, playing for the positive comp, playing for a new CEO pop.   
    SubjectRE: RE: RE: Where's the love for my bonds?
    Entry09/27/2013 01:50 PM
    Memberbaileyb906
    Not sure leverage drops that much.  They were at 4.3 bn debt and raised 800 mm but the updated guidance implies 500 mm cash burn between now and year end, and it has some optimistic Q4 assumptions built into.  So best case year end debt is 4 bn from 4.3 bn, and it may not go down at all if Xmas is terrible or they don't finish all the inventory clearance in Q3.
    SubjectRE: RE: RE: RE: RE: RE: Goldman
    Entry09/27/2013 02:35 PM
    Memberbaileyb906
    300 mm is not a sustainable capex level, especially not to win back sales.  Go ask SHLD what cutting capex to the bone does to your sales.  500-600 is probably a lean normalized level for this company.  And no way sales back to 16 bn without seeing at least 200 mm in costs back.  Ask anyone who has ever worked at a retailer. And they will need to spend on marketing and customer service to get the traffic back.  So assuming they can turn it, maybe you have 380 FCF on 2.9 bn market cap.  Given the execution challenges, a weakening consumer backdrop, the financial leverage, and the chance of more dilution in 14...does a 13% fcf yield really compensate you for the risk?
    SubjectRE: RE: RE: RE: RE: RE: RE: RE: Goldman
    Entry09/27/2013 04:29 PM
    Memberbaileyb906
    Re: capex - there is a lot of wear and tear on stores that if you don't fix, they start looking grimey fast, and people will go to your competitor's nicer looking store.  It's maintenance capex not growth capex.  Have you been to a Kmart lately?  The capex this year was some general upgrades but a disproptionate amount went to the home section and was not spread across the store.  Agree no new boxes and agree no big remodels but according to people I have spoken to, 300mm is well below a sustainable capex level for a retailer with this many stores of this size.  They were spending a lot more than that recently without any new boxes or remodels.
     
    Re: SGA, I think it is store level expense.  There aren't enough people on the floor to service the customer and keep the shelves neat.   They also probably need to invest more in the merchant department but that isn't a big number because it's not that many people.
     
    I had liquidity at 1.3 at year end in my model that I did on 8/20.  The difference between company's 1.5, the street's 1.5, and my modeled 1.3 was all in the Q3 gross margin where I thought the high DSI and the content of that inventory would drive a big gross margin miss in Q3, which I still predict will be the case.  It's not sales, it's not budgets...they were too optimistic on gross margin IMHO.  You can see without even going to a store, just visting the website, that there is a lot of high original ASP inventory from the RJ era at deep discounts.  Stuff like chairs and Christmas trees.  So inventory is high and the cost base of this inventory is high.  Q3 will be a mess but everyone knows that now.  The big swing factor for me on whether Q4 can look better is whether the inventory looks more clean at the end of Q3.
    SubjectRE: RE: RE: Bonds
    Entry10/04/2013 02:03 PM
    Memberbaileyb906
    Gideon - as someone who was short JCP 30 to 9...and I say this not to brag but to suggest that I have deep understanding of this company - I think the scenario that you outline where it limps along for years is the most likely one...see SHLD for evidence.  Unlike SHLD, the equity is no longer tightly held and manipulated here, so it should trade closer to its realistic value, which I think is at best in the high single digits, and likely more like the low single digits.  
     
    If I had more credit and any balance sheet arb experience, I would probably be buying these bonds that widened out and shorting equity.  Those near term maturities on the bonds should be OK bad macroeconomic collapse.
     
    There is no math that supports $20 post the dilution and the debt add...you would need peak all time multiples on peak all time sales on peak all time margins.  Which isn't happening unless M, TGT, and TJX forget how to run their business overnight, or a large percentage of their stores burn down.  Oh probably need some BBBY stores to burn down too as well as long outages at AMZN for this to get to peak sales/margin/multiple...which is what you need for $20.
     
    If $20 was still on the table, you think Perry would be dumping?
    SubjectRE: RE: RE: RE: Bonds
    Entry10/04/2013 02:05 PM
    Memberbaileyb906
    Bedrock - there is news - it's is that they lowered year end cash guidance ex the raise by $200 mm, implying comps or GM below plan for Q3, and/or factors pulling back on them.  That said the debt is still net $750 mm better off than before the raise so it blowing out like this suggests to me that debt holders (Perry, Hayman?) are unwinding debt position and possibly that open interest in CDS is exploding and sellers of CDS are trying to hedge themselves.
    SubjectRE: RE: RE: RE: RE: RE: Bonds
    Entry10/04/2013 02:50 PM
    Memberbaileyb906
    It's a week old but not two weeks old, which may partially explain the initial move in the bonds (but not the follow through).  The fact that factor unrest might have prompted the hurried offering (factors make a lot of decisions about holiday around 10/1) may have also spooked the debt holders as the factors are also JCP debt holders, and I believe senior to them and perhaps with more real-time access to data.
    SubjectRE: RE: RE: RE: Bonds
    Entry10/04/2013 03:16 PM
    Membercnm3d
    i think the equity has just been way out of whack for a long time. i think your best case EPS upside is ~$1.25 in 4 years. M is at 7-8x 2017 estimates, so why the hell would JCP be worth a higher multiple with massively more risk?
     
    youre getting the general bleed out of the investors here. there were tons of guys long JCP for a pop on positive SSS in the back half, and theyre all just dumping it because 1) that's a stupid thesis and 2) equity guys dont really understand capital structure (myself basically included) and now they need to understand the parts.
     
     
     
     
    SubjectRE: RE: RE: RE: RE: Bonds
    Entry10/04/2013 03:37 PM
    Membercnm3d
    bailey - lol, if there is a rash of arsons in mid-tier department stores, we'll know where to look
    SubjectRE: RE: RE: RE: RE: Bonds
    Entry10/04/2013 05:43 PM
    Memberbaileyb906
    cnm3d - I think you nailed it with the first comment
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