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I write about the theory and practice of investing and in doing so I try to take a value investing approach. You can follow me here on twitter: https://twitter.com/nomeansum
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No Mean Sum
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  • J.C. Penny - Don't Call It A Comeback!

    Introduction

    What follows is a short pros and cons breakout of my thinking about J.C. Penny (NYSE:JCP). Normally, I would focus more on price and value, however due to the more or less binary nature of the situation, I think this form of consideration is actually more relevant (at least of for the equity).

    A warning, I rely on a very recent visit to a J.C. Penny, and my anecdotal impressions as a basis for my analysis.

    Pros:

    - The change in leadership is the catalyst. Mike Ullman may not be Steve Jobs, but at least he's not Ron Johnson. Ullman doesn't have to reinvent the wheel, just throw out awful, and reinstate the things he was doing before he left. Which is not to say it won't be challenging. He has to work with a team that he didn't get to pick, and with very little in the way of liquidity to make the adjustments he might want. But I think changing the merchandising mix, putting more associates in the stores, and getting registers in the right places, are just a few of the important things that can be accomplished with minimal expenditure.

    - While visiting the major Manhattan location, I spoke to several employee's who were encouraged by the changes that Ullman has been implementing. First and foremost, they appear to be adding more cash registers and associates, which to me, seems absolutely necessary. Johnson's idea was to increase productivity by arming each associate with an iPhone-type checkout device. The employee's told me that this caused problems because many of the customers want to pay in cash, which increased the lines at the remaining physical registers and hurt sales (conversion). The other reason owners should applaud more registers and people in these stores is that in such large spaces, they serve as points of reference and information for shoppers who might otherwise get frustrated with new layouts, and general vastness of the store.

    - They are bringing the old pricing structure back. If this was a silicon valley company, there would be thousands of articles lauding the company for re -"gameifying" their shopping experience. (What are coupons if not a game?) I don't understand it, and neither did Ron Johnson but the fact is people just love coupons. Don't underestimate it.

    - What happened to the company is at least in part Bill Ackman's fault. But even if this proves he's a retail incompetent, it's hard to deny that he's connected to a large amount of cash and committed to seeing the company survive. So at least the ownership is strong, if not savvy.

    -There are reports that the companies online traffic is improving.

    Cons:

    - Liquidity is a major concern. Based on my estimates, the company has access to about 3bln of cash and credit, and will burn about 1bln annually if it maintains its current sales and margins. That being said, if the holiday sales fail to improve materially, it seems very likely that there will be some kind of equity offering on terms that are extremely dilutive to current shareholders. Therefore, though Mr. Ullman's challenges may not be insurmountable, the element of timing dramatically increased the risk for anyone thinking of investing in the equity before year end results.

    - There can be little doubt that the company has alienated a large share of its former customers. Some of those customers won't give J.C. Penny another chance until it proves that its a store with shopping at. No one knows how many of these customers there are and how long it will take, but for a company with limited liquidity it's a major concern.

    - My visit to the Manhattan location's home section inspired little hope of an improved performance from the home category. The kitchen appliance section was virtually empty and the presentation / product mix was, I don't know how else to say it; bad. The "home" category has historically accounted for ~20% of revenue, and so continued weakness in this category will hurt overall performance.

    Conclusion

    One thing is for sure, J.C. Penny isn't a risk free return. No one knows what the future holds, and anyone who tells you otherwise is lying. That said, in my judgment, it's more likely than not that Ullman can conjure a comeback - after all, he's been here for years.

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

    Tags: JCP, long-ideas
    Aug 06 10:55 AM | Link | Comment!
  • TRLG - Seeing The Wood From The Trees

    TRLG Q1 Earnings

    When in my previous post I forecast that TRLG would disappoint either this earnings release or soon I have to admit I was hoping to be right and sooner than later. I could not have imagined that what I would get would be even better, and that I would be dead wrong.

    Here's what happened: according to Forbes analyst's were looking for earnings per share to be 34 cents per diluted share, against 41 cents in Q1 2012. Adjusted for expenses related to acquisitions and executive termination, earnings were 22 cents. A solid miss by any measure. But it didn't matter; True Religion announced they are being acquired by ToweBrook Capital Partners for $32.00 per common share. The stock immediately popped 8% leaving anyone who was short to be carried out on a stretcher.

    I can't short stocks because of my employer doesn't allow it, so I wasn't involved. But honestly if I could I probably would have been short a small amount and taken a hit. Like everyone else I knew there was a chance they'd be taken over; they announced they were exploring options, and even fired the CEO. But I figured if it was going to happen they wouldn't do it on the day of an earnings announcement - obviously I don't really know how these things work - and they did.

    In the end this actually worked out better than I could have hoped for. I didn't lose any money, and I learned a lesson; How you can be right on one aspect of your thesis and still make a decision that is operationally wrong. In investing, you don't get many free lessons like these.

    My Two Cents On The Deal

    Interest rates are at all time lows, the junk bond market is on fire. This may have been bound to happen once they got the CEO out of the picture. And net-net the transaction actually kind of makes sense for everyone.

    For the shareholders, aside from the near impossible task of the board finding a solid executive team to replace the existing bunch, this was probably the best option (take the money and run). The buyers at Towerbrook probably figure they can take the cash out, lever this sucker up and keep the ship afloat, that everything will be alright. Hell, they might even get lucky and find someone with some taste to spice up the offerings and really make some money. Everyone might win.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    May 14 8:02 PM | Link | Comment!
  • The Emperor Has No Style - True Religion Will Disappoint Someday

    TRLG Will be posting earnings tomorrow and while I know that this is anecdotal, and very difficult to forecast one quarter, I have to say that if I could get short here I would.

    Every time I walk by their store in the mall there is no one in there, and more importantly, their styles always look the same. I know that you aren't supposed to bring an opinion on style into an investment decision (I wouldn't't have believed they could have sold as much as they have so far) but I have to say that personally, I think the clothing is not only over-priced, its boring and unfashionable.

    They were cool and small in LA when they started, then they got really famous and trendy and now that trend has flamed out and they don't have the creative team to deliver another hit product. This has happened to many companies, many times before; it's called being a one-hit-wonder. There is no Steve Jobs of fashion at True Religion.

    They just happen to be sitting on a mountain of cash which makes it dangerous to short them (limited downside).

    These are just my thoughts, not a recommendation.

    Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in TRLG over the next 72 hours.

    Additional disclosure: I have no position in this security, but if the price went low enough, I would buy it. Like I said, they have a lot of cash.

    May 09 6:03 PM | Link | Comment!
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