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J.C. Penney: Rush For The Door

Juggler profile picture

J.C. Penney (JCP) results came out yesterday and they paint a depressing picture, to say the least.

Cratering Sales

J.C. Penney has come under my radar since Ron Johnson signed on to the CEO position back in 2Q 2011. Needless to say, the situation has got much worse than it was two years ago: -25% in sales worse. By comparison, the contraction related to the 2008 crisis disappears.

The earnings release was just dreadful:

  1. Sales of $3.88 billion came well below the expected $4.08 billion
  2. EPS of $(1.95) just made the expectation for a loss of 24 cents

But the most worrisome data point was that same-store sales actually went down 32% for the fourth quarter. In fact, even though the sector has seen better times, peers like Macy's (M) are, on the contrary, clearly enjoying a nice momentum.

Macy's, by comparison, easily beat expectations of $1.99 for EPS and $9.3 billion in revenues by posting earnings per share of $2.05 and sales of $9.4 billion. Same-store sales were actually up 3.7%, and data for January points to a growth of 11%.

If we look at the last 6 years, while between 2007 and 2010 the company was already burning its assets, and sales and EPS were already contracting, 2011 dramatically increased this decline.
(Click to enlarge)

Wrong strategies

J.C. Penney is literally being eaten alive by its turnaround story, with assets contracting almost 30% in just two years. While the company is betting all its chips on its "shop-in-shops", and spending cash like there's no tomorrow to build them, this strategy doesn't seem to be paying off. The same Bill Ackman, who has been a well known bull on the stock, acknowledged the problem last month on CNBC.

"The problem with the vision is it's a small

This article was written by

Juggler profile picture
Management and economics student. Intrigued by stocks, especially by Apple and the tech space. Lives in Italy.

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Comments (44)

The funny comment from George Mason actually highlights one of the challenges of managing a national assortment. Taste is a function of region, age of consumer and competitive context. Chances are high that lime green and lemon yellow will not have universal appeal. Along the path to 700 Joe Fresh or other shop in shops will be the point at which they reach the universe of grey and navy and then each successive shop will offset the upside from the initial shops. Trading densities are not surprisingly also correlated to population densities. So I would be keen to know how the forecasted benefits of shop in shop anticipate the inflection points of selling in the world of blue and grey and what assumptions were made regarding the curve of trading densities from Nogales, AZ to Roosevelt Field, LI?
Amen Snoopy... Ackman did an old fashion bear raid on HLF....trying to cover his JCP losses.....going public to add futher pressure to HLF....well one old Grizzly Ackman forgot about and PUBLICALY disparaged was ONE Icahn.....Icahn waited til today to announce his board appointments on HLF...and His possiable interest in increasing his stake in HLF....right when Ackmans bleeding on the JCP side ....Icahn hammers him...now hes bleeding out both ends.....Icahn will send Ackman out on a stretcher...because he can....Law of jungle don't mess with something bigger than yourself...
Cramer today said JCP is a lost cause. Too bad he didn't realize that when he advised his viewers to buy JCP at $35 in Jan 2012.


I also wonder how Ackman explains his huge buy of JCP after his similar disaster with his TGT purchase. I guess he'll have to resort to spreading lies about other companies like he did with HLF.
JCP's Johnson shows you you do not have to be smart to be a CEO. Getting rid of sales was a stupid idea.
JCPonderings.weebly.com profile picture
Ever know an old dive bar in your town? A sad old place full of a handful of red nosed weary eyed customers who cringe whenever they see anyone who isn't one of them walk in and look around?

That was the old JCPenney. For the sake of this analogy, I'll call this old dive bar Dukes.

Sometimes owners of Dukes give up and sell their business. Sometimes a hipster comes along buys the place with dreams of making it cool. That would be Ron Johnson.

For the sake of analogy, though, it's important to say that Dukes owner has kind of retired but has hired new manager Ron to make Dukes as vibrant and fun as it was back in the late 60s.

And so Ron starts updating the bar. You know -- giving it that coat of paint it should have had decades ago. Polishing the bar for the first time since it was installed. Getting that old smell out of the place. Completely re-doing the bathrooms. Replacing the seats and cushions. Upgrading the cash register to one of those touch things. Giving up on Bud Light and Michelob and getting in some Stella and Fat Tire. Inviting local young bands to play instead of never ending jukebox 70's classic rock.

This is a fairly sound analogy so far, right? And so with this in mind let me ask you something: would you be the least bit surprised if the old customers ditched this bar? Each and every one of those red nosed weary eyed alcoholics?

I wouldn't. And I also wouldn't describe it as customers 'fleeing'. Or 'not liking the new beer list'. Or 'hating the new paint job'. There's something fundamentally flawed (and pathological myopic) about said statements. They all infer that the changes were intended to please the old customers as well as the new.

That's just plain crazy.

The old customers aren't 'fleeing'. They're not running for their lives. They've really been asked to go find another lifeless dive bar (Kohl's, Sears, whatever) in which to disappear. They've been shown the door because the owner hopes that its new manager Ron can bring in new cool kids and make the bar a happening spot.

But in order for THAT to happen the transition has to be complete. Or more than halfway there. Since a department store is only 1400 times more elaborate than a bar, the remodel takes time.

Here's the other piece: the owner of Dukes insisted on keeping the name Dukes. This sets up a MASSIVE marketing problem. All the kids know Dukes is the place old losers go to get bombed. A place that serves urine like beer. They're completely unaware that the place is meant for them now and not Vietnam vets.

And so when I read all these articles about Wall Street numbers I get that people are really worried. But I never ever hear the correct reasoning to be worried.

All the best products in the store vaporized the week of Black Friday and were never replenished. If you already knew that you're a JCP shopper and know what you're talking about. If you didn't know that you have no business talking about the store --

-- because you simply don't get it yet.
TSOH_Investing profile picture
In this analogy, is the dive bar referring to merchandise? If it is, please name the specific product line that has been removed from the store that has drove away these old, loyal customers (you stated that "all the best products" vaporized the week of Black Friday - which ones exactly?)

If it's not the merchandise, then I'm assuming you're referring to sales? Here's the critical question - when sales return, which they are as noted by management on the Q4 call, will Duke's old customers come back?

I think the answer is yes. The thing is that Duke's customer never real cared about the restaurant or the food all that much - it was the happy hour specials that kept them coming back. In JCP's case, they'll spend plenty of money telling old customers sales are back. They won't get it all back, but I think it's pretty nutty to assume these "loyal" customers won't be enticed to come back when offered sales, the only thing that got them buying anyways ( 98.7% of all JCP's sales in 2011 came from products marked 20% or more off); when happy hour returns, Duke's core customers will come back for the cheap drinks.
And you've lost another 25 percent of your investment, if you have one, pitching this loser. There is no excuse in retail for running out of the best products on Black Friday . Unfortunately, this is happending with the spring lines also and JCP will never improve until someone fixes these rookie merchandising mistakes. And that penneyponderings is 39 years of retail buying experience speaking.....I'm beginning to think your a plant by Ron Johnson....nobody could be ignoring the no- show results of Ron Johnson. At this point, it would be a world record retail miracle to just get back to their former position!
JCPonderings.weebly.com profile picture
The way you always call Ron a loser and a rapist doesn't make me think you're the least bit objective.
Yes, we all want lime green or fluorescent orange hot pants from Joe Fresh.
Sorry GeorgeMason but those lime green pants you want are only available in sizes 28 or 44....,., LOL.
How much more of Ron Johnson can they take? I was at JCPenny's last night and it is pathetic. They have no inventory and there are so much open space it looks like they are closing. I asked the sales clerk what is going on and she said "the truck hasn't come in". I think the ship has already left the dock and unless they do something fast customers won't be returning.
Zach Mansell profile picture
Ackman came out said new stores were doing $270+ sales per sq. ft. in comparison to the rest of the stores which is only doing $130 (or less at this point). He's on the board and would get in trouble for any misrepresentation of these figures if they were wrong. Ron Johnson refused to give numbers at the meeting yesterday, but he did say that the new stores had continued to the trend of outperforming the rest which suggests to me that they are still operating around this level.
Agree on this point Zach. I just don't understand why RJ would not reveal or confirm the numbers quoted by Ackman. On a day when all of the news was bleak, this would have been THE statistic to promote some optimism. Instead, it seemed to me he dodged the question. Based on performance otherwise, it makes me think either the Ackman numbers were a little too rosy, or perhaps even worse these positive sales have begun to receed in the new stores. Pure conjecture on my part.
Zach Mansell profile picture
I think the issue is Ron Johnson came in over-promising and under-delivering. A stock gets blasted if it misses expectations...even if results are good. This has constantly been the case with my shares in GOOG in the 4 years I've held it. By setting expectations high, Ron Johnson was setting the stock up for an epic fall if those expectations were missed (they were).

It wouldn't surprise me if he's adopted the strategy of being mum on most forecasts and issues in an attempt to underpromise and over-deliver. Apple was notorious for sand-bagging estimates and then blowing them away when they announced earnings. Maybe he's attempting a similar strategy by not building expectations.
That was a while back. What about currently? No one has confirmed these statistics currently and until they do it's anyone's guess considering they reportedly are always low on stock/sizes for these shops.
I figure any manager out there with this company, MOD, LOD, Key holders etc are an endangered species right now.

I hear "Taps" for all of us.

Hey Ron...take a bow buddy!! You finally broke us!!! AND in record time!!
Zach--- With regards to your comment on how the new shops are doing, RJ wouldn't answer this question yesterday during the Q&A portion of the webcast. They keep telling us the new stores are outperforming the rest of the store, but they won't reveal by how much. Why? ...and the noise from employee layoffs, their comments yesterday were less than encouraging for any employees. Seems to me they answered pretty clearly they will continue to make cuts.
Zach Mansell profile picture
Ackman came out said new stores were doing $270+ sales per sq. ft. in comparison to the rest of the stores which is only doing $130 (or less at this point). He's on the board and would get in trouble for any misrepresentation of these figures if they were wrong. Ron Johnson refused to give numbers at the meeting yesterday, but he did say that the new stores had continued to the trend of outperforming the rest which suggests to me that they are still operating around this level.

Also, as a disclosure, I am long a few shares and a few option contracts, but am not a raging bull. I just simply like the risk-reward presented here. I think that people are focused on all of the noise as opposed to the two things that mattered. The things listed above are the future of the company. Everyone is focused on what the company is now and not what it's transforming into being. I don't care how poorly the company is doing now as long as it can make it through the transformation because the parts that have appear to be doing really well.
Juggler profile picture
Agree. From what I've read of the conference call, RJ focused more of the good the management is allegedly doing, while avoiding to talk about how that the whole thing is actually close to falling to pieces.
how is it working out for you...?
Something I keep writing about concerning JCP, as a former retailer, is that their merchandising has gotten much worse. Even if some of these shops within a shop garnered some interest, the sizes are bought all wrong, the colors are bought wrong, and as soon as a couple of purchases are made they are essentially out of stock. The styles they carry do not appeal to middle America and they will lead to increased markdowns , and with RJs reduced margins, it will be further declines in profit.
A further problem will be if he decides to discount again (which I saw yesterday in a local store). How do you discount a low margin $6 top, designed to sell at that price, and not lose money? The only option is to begin raising margins and therefore prices....how is that going to square with customers?
Juggler profile picture
Well said karmike, thanks for your comment.
28 Feb. 2013
JCP will be carrying the Joe Fresh brand of merchandise starting some time this spring. Joe Fresh is a low priced line of fashion apparel and accessories that originates out of Toronto's Loblaws grocers. They cater to young consumers and have done a good job keeping up with current trends, not at all frumpy. They compare well to merchandise from Gap, Old Navy, and Banana Republic. Excellent line of kids clothing that can rival GAP Kids. Quality is average and price conscious consumers will see the similarities unless you are stuck on brand names. Seems to be well received in NYC as a stand alone store. If this doesn't work for them, what's next?
Zach Mansell profile picture
Your quote from Bill Ackman seems a little misleading to the extent that it suggests that the shop-within-shop concept only consisting of 10% of the store sq. footage. The way you quote it makes it sound like this insubstantial amount is all that there will ever be.

By the end of 2015 this number will be 60% of store sq. footage. The remaining 40% will still be remodeled and revamped with new inventory which I believe they already have been. The other thing mentioned by Ackman is that this square footage is doing twice the sales as any other pieceof JCP and that is after the new "shops" had been open for less than year. It takes years to receive full market penetration with some retail strategists suggesting that you only get 70-75% of customer adoption within the first year. This means we could continue to see sales at these new shops grow for the next 2-3 years simply as customer adoption increases.

They have been heavily discounting old inventory which has been making up the bulk of their sales. This lowers sales per sq. ft, comparable store sales, and etc. This is clearing the space to bring in new shops this year. Most of this inventory should be cleared by March and that's when Joe Fresh opens too.

JCP is getting rid of the coupon clippers and adopting younger customers who are willing to buy items that are reasonably priced and not demand 75% off sales every day of the week. This is going to hurt in the short term, but will help in the long-term if they are successful.

Only two things currently matter for JCP.
1) How well are the new shops doing? Incredibly well compared to the rest of the store.
2) Do they have the cash to continue converting more stores to reach a self-sustaining business model? This is up in the air, but is looking positive.

Everything beyond those two is just noise for now.

It should be obvious by the quarter ending in June whether or not this is a success or not because you won't have the noise from employee lay-offs, restructuring charges, excess inventory dragging down revenues/sales per. sq. ft. , and more of the stores will be converted.
Juggler profile picture
Zach, you raise some good points, but I don't agree with you that all the rest is "noise".
The Ackman quote tells the truth: now the shop-in-shop takes around 10% of the total footage. The plan may be to bring it up to 60%, but I wouldn't be so sure that they'll manage to do it. It takes cash, and they're burning it quickly.
Morgan Stanley's Kimberly Greenberger is now out saying that JCP is deferring payments to vendor, probably to shore up cash. Doesn't look like a good sign to me.
Zach Mansell profile picture
It depends on how you measure cash burn. Last year, they only "burned" through 10M, have over 900M in cash at year end, and have a credit line for 1.5B+. Obviously this is after the sale of a lot of non-core assets but much of their 900M loss is non-cash in nature.

They also managed to implement over 800M in expense cuts last year and have an additional 100M slated for this year. These cuts last year weren't in effect for the whole year so you wouldn't see the whole effect that they'll have. The 10% of new stores weren't open the whole year either which means that they didn't bring in cash as they will likely bring in this year. The point being, 2013 will probably be better in terms of cash burn than 2012 was and they have plenty of cash on hand to manage that.
Zach Mansell profile picture
Just as a follow up, that 10M figure is a reference to operating cash flow. They did burn through much more actual cash than that, but the point was that this cash burn is controllable in that it is very much related to transformation efforts with the stores and can be delayed if cash becomes tight. They have some 2.5B in liquidity to work with in a worst case scenario.

Look to see how Joe Fresh is received as it will be opening up in two weeks. Apparently it's the best seller on their website with only 20% of those orders arriving from NYC and CA (the only two places in the U.S. with free stanidng Joe Fresh stores) suggesting a wide audience for the product here in the U.S.
Grand Nagus Kelly profile picture
What I could never figure out is what people buying JCP stock were thinking. The JCP in my hometown is deserted. Has been for years.
Haha Ackman, HLF now has more annual revenue than JCP , you truly are a fool
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