Tag Archives | JC Penney

VIDEO: Will JC Penney Survive 2014?

I joined Varney & Co. on Fox Business this morning to discuss the future of JCPenney (JCP) and JCP stock.


JCPenney is having a rough go at it today, with JCP stock down more than 9% as of the time of this writing. The impetus for today’s thrashing appears to be the news that Hayman Capital’s Kyle Bassliquidated his large position in JCP stock, admitting in a Bloomberg interview that the purchase was a mistake.

The aggressive buying by Bass — and of several other highly followed investors, including George Soros, Whitney Tilson and Jeremy Grantham — was one of the greatest bullish arguments for the company. JCPenney CEO Mike Ullman also recently put a million dollars of his own money into JCP stock, very visibly showing the world that management — along with the hedge fund masters of the universe — had faith in the turnaround.

Bass’ departure throws a nice big bucket of cold water on this argument.

JCPenney is showing some modest signs of life. Same-store sales rose modestly in October, and they rose by a whopping 10% in November. But we’re also comparing these results to 2012, which was one of the worst years in the company’s history. Same-store sales remain well below their 2011 levels.

There also is the pesky question of margins. Yes, sales are up. But JC Penney is offering some of the most aggressive sales pricing in its history. Gross margins were already in free fall in the first three quarters of 2013–before the Black Friday sales.

Amazon (AMZN) can get away with posting thin margins because it is a growing business and it is a market leader in e-c0mmerce. It also has the faith of its suppliers and of Wall Street behind it. JCPenney has neither of these things, and it has a growing pile of debt.

Between cash and short-term borrowing, Penney has about $2 billion in liquidity at the moment. But unless margins improve, the company will burn through that cash in less than a year. This means Penney will be at the mercy of its lenders to extend additional credit…or face the prospect of bankruptcy.

I made similar arguments in a recent CNBC appearance, commenting that Penney was on an“express train to oblivion.”

The other bullish argument for Penney is simply that it is cheap. And looking at the numbers, you can make a case there. Walmart (WMT)Target (TGT) and Kohl’s (KSS) all trade at price/sales ratios of around 0.5 to 0.6. JCP stock trades for less than half that, at around 0.25 times sales.

Of course, Walmart, Target and Kohl’s are all relatively healthy. JCP is only cheap if you believe the company will survive. And frankly, that is a highly speculative bet.

Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he did not hold a position in any of the aforementioned securities. Check out his new premium service, Macro Trend Investor, which includes a free copy of his e-book, The New Megatrend Investor: The Ultimate Buy-and-Hold Strategy That Will Make You Rich.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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JC Penney On Express Train to Oblivion

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.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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The JC Penney Saga: Are Poison Pills Good or Bad for Investors?

For a staid old department store with a 111-year-old history, JC Penney Company (JCP) has been in the news a lot this year, though not for any noteworthy operational developments; the retailer continues its slow march into irrelevance, and it’s not likely to change course any time soon.

The headlines have mostly surrounded one particularly vocal shareholder, Bill Ackman of Pershing Square Capital, who owns about 18% of the company.  Up until recently, Ackman was also on the JC Penney board of directors…until he resigned in a hissy fit after demanding that the company replace its CEO within 45 days.  And this after Ackman’s choice for the job—former Apple (AAPL) executive Ron Johnson—ran the company into the ground.

Ackman likes to think of himself as a “shareholder activist” who shakes up complacent or self-serving company boards and unlocks value for shareholders.  But to his detractors, he is nothing more than a corporate raider—a pirate in a suit that loots and leaves.  JC Penney Chairman Thomas Engibous called him “disruptive and counterproductive.”   And given Ackman’s recent behavior, it’s hard to argue with the chairman.

All of this brings me to Penney’s new “poison pill” provisions.  After the Ackman experience, JC Penney never again wants to become the personal plaything of a hedge fund titan.  For those unfamiliar with the term, a poison pill floods the market with new stock in the event of a hostile takeover.  It makes it impossible—or at least very expensive—for a corporate raider to take over a company without management’s blessing.  The Penney poison pill would kick in whenever an outside shareholder acquired 10% or more of the company’s stock.

And this is where the theater of the absurd starts.  The poison pill is being called a “shareholder rights” plan by management.  So, we have a “shareholder rights” plan being implemented to protect investors from “shareholder activists” like Ackman.  If you’re a Penney shareholder, you must really feel special.  It looks like everyone is looking out for your best interests.

Except that they’re not.  Corporate raiders like Ackman—and some of his high-profile rivals like Carl Icahn and Daniel Loeb—are absolutely correct when they say that corporate managements tend to run companies for their own benefit rather than for the benefit of the shareholders.  In business school they call it the “principal-agent problem,” but we don’t need to get bogged down in fancy terminology.  Unless motivated by altruism or idealism, people tend to look out for number one first.

So if management are the “bad guys,” does that make Ackman & Co. the “good guys.”

If you believe that then you have no business investing.  “Shareholder activists” may inadvertently help smaller shareholders by driving up the stock price after successfully engineering a reorganization of the company.  But they do so for their own benefit, not yours.  This is Wall Street…not charity.

So, now that I have sufficiently jaded your view of humanity, what are we to do with this information?  Should we view poison pills favorably…or should we run away screaming when a company we own implements one?

I would frame it like this: If you’re investing in well-run companies, it generally won’t matter.  Good companies with healthy prospects generally don’t need poison pill provisions.  Yes, Bill Ackman made a mess of JC Penney.  But JC Penney was already a company in terminal decline long before Ackman got his paws on it.  Rather than waste your time and capital on an investment in Penney, you could have invested in a healthier rival like Wal-Mart (WMT) or Target (TGT)—both of which are monster dividend raisers and share repurchasers.

And Wal-Mart is a fine example of the next point I’d like to make.  If your last name is Walton, then your livelihood disproportionately depends on the performance of Wal-Mart.  The same would be true of Michael Dell and Dell Inc. (DELL).  When your name is on the signage, the company’s destiny is your destiny; you can’t simply walk away.  But outside investors—and particularly regular, individual investors—have the luxury of voting with their feet.  If you don’t like the way a company is run, don’t waste your time in a shareholder proxy fight that you can’t realistically influence.  Sell the shares and allocate your funds elsewhere.

Finally, while you should always assume that a large high-profile investor is investing for their own benefit and not yours, it doesn’t mean you can’t tag along for the ride.  I regularly look at the trading moves made by my favorite money managers.  But be careful here and choose your gurus and their picks wisely.  Yes, Carl Icahn is a smart investor, and yes, tracking his trading moves can be insightful.  But I would steer clear of some of his recent high-profile buys like Dell and Herbalife (HLF). Both have become battlegrounds for hedge fund titans, and as an individual investor you have a serious information disadvantage.

Disclosures: Sizemore Capital is long WMT.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Three Retailers That Should Be Thankful They Are Still in Business This Thanksgiving

This is the time of year for giving thanks, and we all have quite a bit to be thankful for.  Though we complain about having a divided country, we live in a place where power changes hands without violence.  And for all the angst about rising taxes, at least we live in a country where work is still rewarded with the possibility for great wealth.  The economy isn’t the healthiest right now, but it’s still a fine time to be an American.

That said, there plenty of companies who aren’t doing particularly well and who should be thankful that they are still in business at all.  And by next Thanksgiving…they may not be.

I’ll start with electronics chain Best Buy (NYSE:$BBY). Best Buy posted earnings this week that were wide off the mark of expectations, sending the share price down a quick 8%.

Big deal; companies miss earnings all the time, right?  Yes, but Best Buy’s problems run far deeper than a single earnings release.

The company has become the unofficial (and unpaid) showroom for the entire electronics industry.  Want to check out the new Samsung Galaxy phone…or Microsoft (Nasdaq: $MSFT) tablet?  Then you drive to Best Buy.  But do you whip out the credit card and buy it there?  No, probably not.  Not when you can go to your smartphone and order it on Amazon.com (Nasdaq:$AMZN) or another discount online retailer for far cheaper…and get free shipping.   The Washington Post reported that fully 20% of shoppers plan to “showroom” their Christmas shopping this year.  And this number should only continue to grow.

There is no easy way out of this problem.  Best Buy can improve its web presence and try to attack Amazon head on, as Wal-Mart (NYSE:$WMT) is attempting to do.  But they are still going to be at an enormous cost disadvantage for having to maintain an expense network of stores and employees.

Perhaps Best Buy should accept its role as Samsung, Sony (NYSE: $SNE) and Apple’s (Nasdaq: $AAPL) showroom and ask that these manufactures pay them for the publicity.  I don’t see that approach working, mind you, but their current approach isn’t working either.

Next on the list is JC Penney (NYSE: $JCP).  There comes a point in a retailer’s life when it is simply no longer relevant.  Best Buy still gets foot traffic, and some of those visitors do actually buy while in the store (after checking the prices of competitors on their phone, of course).

But JC Penney?  Not so much.

As I wrote in a recent post, JC Penney is toast.  The company is a “tweener,” squeezed between Wal-Mart and Target (NYSE:$TGT) on the low end and Dillard’s (NYSE:$DDS) and Macy’s (NYSE:$M) at the mid-range price point.  And I’ve said nothing yet about deep discounters such as Ross Stores (Nasdaq:$ROST) or, again, online retailers such as Amazon.

There is no compelling reason to go to a JC Penney store, and it shows in the company’s results.  Revenues have been stagnant for years…actually fell by 26% last quarter.   Earnings are firmly in the red and have been for the past four consecutive quarters.

In a weak overall economy, I do not see a future for a marginal retailer like JC Penny.  Outright bankruptcy might still be a few years away…but I see no recovery for a store that has already fallen so far in relevance to shoppers.  I challenge you to name a single friend or family member who has shopped there in the past 12 months.

And finally, we come to RadioShack Corp (Nasdaq:$RSH).   I do not see RadioShack surviving to see another Thanksgiving, at least not in its current form, and from the looks of things, neither does the market.  The stock has lost 84% of its value over the past year and over 90% since 2011.

If Best Buy’s business model is under threat, then how much worse off must RadioShack be?  The company’s niche market of specialty electronic parts and components has been absolutely killed by internet competition.  An on those days you need a particular part or cable immediately and can’t afford to wait for shipping, you’re going to get a better selection at Fry’s Electronics or even Best Buy or Wal-Mart.

RadioShack has tried multiple times to reinvent itself by selling things such as mobile phones and service and mainstream consumer electronics.  But by doing this, they are competing head to head with big-box retailers and the mobile phone providers themselves.  It’s hard to see how RadioShack can compete here, and frankly, the numbers speak for themselves.  The company has had three consecutive losing quarters…and this losses have gotten bigger with each release.

RadioShack is also saddled with $750 million in debt…$375 million of which is due in 2013…and a market cap of only $193 million.

Investors might get bailed out by an acquisition here.  At the right place, Best Buy or some other electronics retailer might the chain to be worth buying.  But barring this, I expect RadioShack to bleed to death in the very near future.

Disclosures: Sizemore Capital is long WMT and MSFT.

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Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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