QTR & JCP - A Checkered Past
Sometimes I like to share some anecdotal life lessons that I learn from my Seeking Alpha contributions. So, here's something I found out last month: you don't make a lot of friends with J.C. Penney (JCP) longs by penning an article called "JC Penney is Dying Like a Crazy, Headless Chicken". Go figure.
I started calling J.C. Penney a short in the first quarter of 2013, in the midst of a compost heap of problems the company is currently buried under. JCP currently is trading at $14.22, down 20.9% in the last three months, down 27.2% since beginning of 2013, and down 48.7% in the last twelve months. The company has, however, pared losses slightly since my last article calling it a sell - that should tell you a bit about my heavy hitting resonance on the street. Wink, wink, nudge, nudge.
I've written about four or five articles on JCP so far this year indicating my bearish lean (read: the company is going "Hindenburg") on JCP, so what more could there be left to cover? I've already systemically dismantled the company by presenting my previous arguments:
- The brand is past its time
- Johnson's solutions were a disaster
- The stock technicals were ugly
- The retail sector as a whole is slowing down
- The company was wasting money on lawsuits
- JCP's "iconic" status can't save them
- The remodels didn't change enough
- The company admitted that nothing they were doing was working
- The Board of Directors was turning into an after work bar fight at your local Applebee's
Well, believe it or not, there's some new items to touch on that have come up lately - both of which continuing to support my bearish case. As an added bonus, I'd like to dispel a common bullish myth behind JCP.
Although showing short signs of life on small pieces of news that was viewed as good by investors over the last 6 months, the stock hasn't been able to eclipse $20 in the last 6 months. Let's take a look at how JCP has been faring over the last 6 months, and have a quick up-to-date technical review:
Despite yesterday's run up, we're still in the midst of a technical downtrend that's likely to continue. As the stock was oversold per the chart's RSI in mid-August, this recent run up acts as a semi-correction from a technical standpoint. Both moving averages continue to slump in correlation with the waning stock price.
What's New This Week
It was reported on Thursday of this week that JCP was finally going to drop Martha Stewart's line from its stores - something I've said since early this year that they should have done:
Martha Stewart's getting dumped by struggling retailer JC Penney, The New York Post reported.
Penney CEO Mike Ullman decided to do away with Stewart's home-goods line after they didn't sell well, The Post reported. The decision follows a long courtroom battle with Macy's about the partnership with the domestic maven.
"Mike said her designs aren't that great," according to an insider close to the company quoted by the paper. "He says they're not selling, and they're nothing that your normal Joe Schmoe can't come up with."
A ruling is expected within the coming days about the suit that was sparked by Macy's pre-existing licensing deal with Stewart.
"Ullman made the decision for the judge," according to a source briefed on the situation, the paper said. "They definitely are not going to carry [Martha Stewart home goods] any longer and [they are] not waiting for the court ruling."
This is the right move, but in my opinion it's too little too late here for JCP. I made my case for ousting Martha Stewart in March of this year:
Martha Stewart, no Martha Stewart : dealbreaker for the company? Probably not. I realize that the Martha Stewart brand name captures a certain demographic of shoppers, and that they provide a significant revenue stream wherever they are sold, but again, we're missing the point.
Nobody in my generation or my child's generation is going to have the same fixation on Martha Stewart or her products. In the era of Target offering up hip and quirky looking styles and brands like Thomas O'Brien and Threshold, J.C. Penney is looking backwards, not forwards, by wasting time dealing with Martha Stewart's brand. The price points of the alternate, more stylish brands are what they need to be focused on to take these housewares into a new period for their respective stores. The styles that are selling for my, and future generations are along the non-gaudy yet still hip lines. This is why stores like Anthropologie continue their success while brands like Martha Stewart continue their slow, inevitable fade into oblivion.
Don't believe me? Check out one of my patented homemade archaic diagrams below and tell me which bedspreads you could see a Gen X'er or Gen Y'er using to outfit their home front -- and which one looks like it belongs at a hospice or at your grandmother's retirement community.
Still don't believe me? Want a taste of reality? Take a quick gauge on Pinterest (which can be considered a great litmus test for younger generations - your grandmother probably doesn't use it) and compare number of styles mentioned by above brand name. If I can sit here and produce this type of crude social "market research," why did it take J.C. Penney years to figure this out?
This is the right move, but the wrong execution. JC Penney has already wasted way too much money on the Martha Stewart fiasco in court, and it's already taken its negative toll on the company.
Ackman Bows Out
My boy Bill Ackman is finally starting to get it. Although it was a massive mistake to invest in JCP in the first place, in my opinion, Ackman is doing the right thing by cutting his losses and getting out of the retailer's stock.
Hedge fund manager William Ackman, the biggest shareholder in J.C. Penney Co Inc (JCP.N), said on Monday he had sold his entire stake after his campaign to overhaul the retailer failed.
Ackman's Pershing Square Capital Management sold 39.1 million shares, or 18 percent of the company, to Citigroup Inc (C.N), which is now offering the shares to other investors, the company and the $11 billion hedge fund said in separate announcements.
The decision by Ackman, who stepped off the board two weeks ago amid a growing rift over corporate strategy, to dump his stake pushed Penney's shares down 2.6 percent to $13 in after-hours trading.
Pershing Square said in a statement Citi's offering of J.C. Penney common stock was priced to the public at $12.90 per share and was expected to close on August 30.
The sale marks the end to Ackman's three-year campaign to breathe new life into the Plano, Texas-based retailer. He recruited a new chief executive to upgrade merchandise and make stores more attractive to shoppers.
As a Bill Ackman fan, I think this is the right move. Ackman generally gets a lot of flack from retail investors, who see him as fish food for the bigger "sharks" like Soros and Icahn due to him telegraphing his fund's moves publicly. In my recent article, "4 Lessons You Can Learn From Bill Ackman", I pointed out that his stake in JCP was one of the few things that I disagreed with him on:
As you can see, in addition to Herbalife, Ackman has been involved in failing retailer J.C. Penney in 2012 and 2013. I've spent the better part of the year following a lot of Ackman in the news, and while I don't always agree with some of the moves he's made (namely with JCP - as you can read here), I respect his style and think that there's a couple lessons the average retail investor can learn from Ackman.
I didn't agree with Bill Ackman on J.C. Penney, but do still agree with him on Herbalife. As stated before, this isn't about his decisions as a trader, it's about why I respect him and what you can learn from him.
Other funds have since gone long, showing again that Ackman is going "against the grain", as it seems like he usually is. Even though interest from other funds has picked up on the heels of Ackman's exit, I still contend that Bill made the right move here, as I remain bearish on JCP.
A Bull Argument Dissected
In past articles, I've overlooked some of the bullish sentiment behind investing in JCP, choosing rather to lop on as much bearish sentiment as I possibly could. I'd like to make some amends for that here, but not a lot.
The most common bullish argument that we do hear from a lot of JCP investors is that the value behind the company's assets alone are valued far beyond what the company's share price currently sits at.
The problem with this argument is a threefold. First, people seem to conveniently forget that the company has a $2 billion loan against the real estate of the company - so in the event that they did sell it off, that's $2 billion out the door first and foremost.
Secondly, how in god's name are you going to effectively and quickly sell off over a thousand stores without driving the price of the assets down yourself? Who are the buyers going to be and what are they going to be willing to pay? This whole hypothetical is a farce. It's likely to be sold at nowhere near what it's price would be if they were sold individually [the same type of problem that BlackBerry (BBRY) would have if they tried to sell the departments of their company, and not the whole company itself].
Thirdly, the company is carrying $5.8 billion in debt, which far exceeds the value of its real estate. That's a big one that you might want to read again.
SA Contributor Ben Kramer-Miller hits this nail directly on the head with his analysis of a "what-if" scenario in the case of JCP liquidating:
We already saw that the value of the real estate has to be marked down, which decreases the company's shareholder equity. Also if the company were to liquidate its inventory in order to sell its real estate it would also have to discount this. A mere 10% discount on both real estate and inventory (and the inventory would almost certainly be discounted far more) would decrease this figure by $720 million to $1.58 billion. But if this quarter has been anything like the last one (and there is no indication otherwise), then the company conservatively lost $150 million, and so we are down to $1.43 billion, which means that the liquidation value of J. C. Penney is barely more than half the current share price. If the company took just 2 months to liquidate and we continue to use the $150 million/month loss rate, we are down to $1.13 billion, which means that the shares are just worth $5 each.
With the Stewart mess behind it, Ackman is still making the right move on JCP. The company's liquidation value has been misinterpreted and the bullish arguments on JCP are simply not holding up. Soon, JCP will again report a horrible quarter, and we'll keep delaying the inevitable by debating whether or not the company is going to make it in the long run. This investor believes that answer to be a firm "no". As I've stated in past articles, the ground that this company is standing on has never been shakier. I would consider investing in J.C. Penney at this point an extreme risk of serious loss.
As has been argued by myself and a couple of other SA contributors, this company is one recession or one retail sector crash away from it's inevitable end. The question in this investors mind isn't "if" J.C. Penney is going to go under, it's when.
Again, as I've said in the past, the only possible saving grace for this company would have been to trim a ton of the assets, get the company lean and clean with a brand new business model, and recreate themselves. Unfortunately, it's far too late for J.C. Penney, who remains dead in the water. I don't like seeing companies fail; nor do I like to see money wasted and jobs lost, but all roads in my head lead to J.C. Penney not making it but a couple more years. The cash burn is just too much and the sales continue to lag.
If you're long, it's a great time to hedge or insure your position with puts.
If you're looking to enter a position in JCP, short is the only way to go (still, even in the midst of nearly 35% gains from when I first called it a short). If not, enjoy watching this one from the sidelines -- as the pressure cooker that is JCP continues to get closer to its critical mass, the drama is likely to ramp up and it should be an interesting case study for Ivy League business schools years from now on "what not to do".
As always, I wish all investors the best of luck.