Monday, April 8, 2013


I do not do links much - let alone non-finance links. However like much of the financial world I am wondering whether Johnson can transform JC Penney before he has no liquidity left to play with. The financials are a train-wreck. But leaving a third tier retailer alone in America is also a near-guaranteed train wreck - if you left JCP untouched it would slide from irrelevance to bankruptcy over maybe a decade.

The turnaround logic looks from the outside like:

We must do something.
This is something.
Therefore we must do it.

The link below is a nuanced fashion-based examination of this issue.



PS - The link to this article in Vogue is worth the price of admission ...


taxloss said...

I think that's known as the 'politician's syllogism'

Alex Rose-Innes said...

Good stuff like this:

"JCPenney had one of two courses --

1. Stay the same and slowly fade into oblivion
2. Take a risk and rebrand JCP out of Amish country

Ackman wants to think there was an easy profit to be quickly made by magically doing both somehow. That anyone could make JCP hip enough for new customers but staid enough for old ones. That JCP can both be cool and yet classically quaint. Revolutionary and also ordinary. A JCP where FOREVER 21 and KOHL's gleefully meet."

There are plenty of retailers that have grown old with their clients and then hurriedly tried to capture a new demographic. They ended up losing both cohorts of customers.

Ackman either has a naive or stunningly ignorant view on what it takes to turn around struggling retailers.

Jeff Matthews said...

I'd stick with the non-linking thing. This blog is not readable, unless I'm trying to read the wrong thing.

John Hempton said...

Jeff - readability is not its purpose - but it is perfectly readable.

But it is that it has a few views so contrary to the mainstream...

I love the Vogue article links.

Coconut Pete said...


What are your thoughts on the liquidity issues on JCP? At the risk of boring you, I posted a slightly longer version of the below on Seeking Alpha, which received a collective *YAWN* by the "deep deep" value investors that populate that site :rollseyes:


1) Investors aren’t going to like this, but I think Management would be foolish not to do a big rights offering at a slight discount to JCP share prices today (~$15/sh). The CFO just said at the last analyst conference that he’d “love to raise a billion dollars.” If they want to save the Company, that’s what I’d do too, dilution be damned.


If the Company does flat SSS%, it probably burns $(250)m OCF this year [$0m of EBITDA less $(200)m of interest expense less $(50)m pension contribution]. Throw in another $(800)m of CapEx for the store remodels, and you’ve burned a little over $(1,000)m of FCF over FY2013.

The Company has $878m of cash today [$930m of cash as of 12/31, plus $33m of SPG equity it can sell on the market, less $(85)m of AP it deferred into 2013]. Assuming they can run the business with zero minimum cash (unlikely), that means JCP would be starting FY2014 out with a zero cash balance and an undrawn/partially drawn revolver with ~$1,750m capacity ($1,850m plus $400m accordion less $(300)m LCs less $(200)m inventory/AR lien buffer).

There’s no way I would want to start FY2014 off with a $1bn FCF loss in the trailing 12-months and only 40% of my floorspace remodeled. That’s a scary thought if I’m Ron Johnson.

At some point, your merchandise partners won’t want to do business with you. At what point will that occur? Zero cash and >$3bn of debt (with the prospect for more secured debt on top of you) sounds like it for trade partners.

2) There’s been a lot of talk about the “value of the real estate.” I always laugh when I hear this – it’s really nothing more than levering up the Company further. Whether you talk about spinning off a REIT or doing sale-leasebacks with a real estate investor / bank, it’s the same thing – JCP would simply be trading up-front liquidity for interest payments (a/k/a “lease”).

Michael Price (a dude I really respect and think is very bright) thinks there is $15/sh of embedded value in JCP’s 55m sq. ft. of owned real estate. Ignoring the capital gain tax consequences of this, that’s about $3.3bn of value, or $62 per sq. ft.

JCP’s debt cost-of-capital is ~7% and sale-leasebacks have been done recently in the market at the 7-9% range. So using these rates, pulling forward this RE value would add an incremental $(250)-$(300)m of annual cash expense to JCP.

Maybe Ackman / Johnson are willing to add a bunch of further leverage risk to the story to avoid a dilutive equity raise, but boy, you really start getting tight on the high-flying success acrobatics JCP needs to have with the store remodels in order to generate >$750m of EBIT.

Jeff Matthews said...


Perhaps my inability to comprehend the blog was triggered by the fact that three days previously I had been on a mall store tour in Florida that included the single worst store tour I had been on in my career, which was a JC Penney store tour that had to be experienced to be believed.

I'm still not sure what was more astonishing: the fact that the company did not bring its A-game to the tour, or how uninhabited with customers the oddly-placed Michael Graves, Martha Stewart and Joe Fresh shops were. For all Johnson's hype, the shops came off as tiny, pretty islands in an otherwise ugly sea of unappealing merchandise.

(The deer-in-headlights qualities of the two store tour leaders could well be explained in hindsight by their knowledge that Ron Johnson had offered his resignation a week before--a fact that was only disclosed today)--assuming they had heard of it through the grapevine.)

In any event, Johnson's attempt to make a 10 year transition (that's about how long it took to turn Barney's into a high-end men's retailer) in 1 year is over, whatever the blogger's point was.


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