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On May 16, 2012, Bill Ackman made this presentation detailing his long thesis on J.C. Penney (JCP).

Since then, 3rd quarter results and full year results have been published, as well as the 3rd quarter conference call (transcript and presentation) and 4th quarter conference call.

Now, right after the entire 2012 results were published, it's interesting to see how Mr. Ackman's expectations have stood the test of the two previous quarters, and what it means regarding the chances of his thesis materializing.

The thesis has 3 legs:

  1. Ron Johnson took over the CEO position at the end of 2011, after a successful tenure at Apple (NASDAQ:AAPL), leading the Apple Retail Stores. According to Bill Ackman, he's the right guy to turn around JCP.
  2. The opportunity for cost cutting exceeds $900M annually, which alone should double annual earnings.
  3. Ron Johnson has a strategic plan to transform JCP from an old ladies' cheap kind of store, to a cool Apple-like kind of store, which also offers very good value on the merchandise. With the cool factor, JCP's sales should rise initially to $177 per square foot (as was the peak of 2007), and then, hopefully to advance to specialty store level ($300 per square foot).

Regarding the first point, I have no insight. If any of the readers has recently been to a JCP store and can compare the experience with early 2012, I'll be happy to hear your feedback.

Regarding the second point - cost cutting - out of the $900 million reduction expected in the presentation, the company has managed to cut $671 million, some of which it declares as one-time expenses to boost their distribution and on-the-floor technology. The problem with on-time expenses, of course, is that they often turn out to be recurring.

Regarding the third point - sales. There has been much chatter regarding the falling same store sales during 2012, but in my opinion the interesting figures are those of the new shops, as an indication of the success of the new strategy. In the 4th quarter call, Ron Johnson and Ken Hannah (CFO) declined to give actual sales numbers for the new shops. In the 3rd quarter call, on the other hand, they indicated sales of $269 per square foot in the new shops, vs. $134 in the rest of the store space. There are three important things to keep in mind when evaluating the data:

  1. The $269 figure includes the Sephora stores, which were there prior to the 'shops within shop' initiative, and have generated $600 per square foot. It's not clear how the 'really new' shops are doing.
  2. The $269 should not be compared to the $134 per square foot, which is the figure in the rest of the store (the yet to be renovated part), but to how the space was doing before the renovation - which was $180 per square foot. Impressive results, to be sure, although less dramatic than when compared to the rest of the store.
  3. In Bill Ackman's presentation, he mentions that with the cost savings, JCP just has to return to $177 per square foot to have an EPS figure of $6 per share. It is important to realize that he's talking about $177 per square foot over the entire 111 million square feet space. The $269 per square foot, on the other hand, is for only the actual retail space, which is 64 million square feet. So even at 'new JCP' productivity numbers, they're short of the baseline performance Bill Ackman expects.

So, even disregarding the disappointing overall recent figures at JCP, and focusing only on the areas under transformation, there is a long way to go to achieve Bill Ackman's goals.

Disclosure: I am long JCP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: J.C. Penney: A Followup Of Bill Ackman's Presentation