In early October of 2010 Bill Ackman decided to invest in JC Penney Company Inc. (NYSE:JCP). Since then the firm’s stock has wallowed and today remains lower than the price Ackman bought in at. The firm is edging closer to its 52 week low of 23.44 closing today at 24.27. Despite this Ackman remains positive on the stock.
At the Ira Sohn conference Ackman spent a great deal of time defending the company and arguing that it had now hit its low and was about to go through a huge turnaround. After more than a year and a half at the firm is it possible that Ackman just can’t save JC Penney?
In Maneet Ahuja’s The Alpha Masters Ackman discusses his rationale for getting involved in the company when he did. He pointed to the 108 year old brand associated with the chain as well as what he saw as it under earning its potential on its margins as reasons for the investment. One of the biggest moves he’s made at the company was to replace the CEO, Mike Ullman, with a younger retail chief, Ron Johnson.
So how can the fall in the firm’s shares and its poor performance be reconciled with Ackman’s statements on the firm? For him its all a matter of strategy and now is apparently the time that strategy is about to become effective.
At the Ira Sohn Conference several positives were put behind the retail giant by Ackman. The first is its low rent cost base. JC Penney owns 49% of its real estate and the rest is leased at comparatively low prices. The second is the way in which the firm’s size and brand give it power in negotiation and operations.
JC Penney suffers from several problems that Ackman was able to admit in his presentation. The firm’s brand does not sit well with other premium brands, there is extensive discount selling and the stores under the JC Penney name do not offer a unique or attractive customer experience.
The latter problems needed to be solved before the company could compete for better products. Now that transformation is well underway, according to Ackman, and the company should prosper. At a 14X P/E multiple Ackman suggests that JCPenney could be trading as high as $315 if the firm managed to turn itself around and become a speciality store operator rather than the discount department store it was in 2010.
Ackman expects to have all 100 of his store within a store concepts completed by 2015. A concerted attempt is being made to turn JC Penney around but it hasn’t been easy. Ackman points to the Gap Inc. (NYSE:GAP) 1980s turnaround in his diagnosis of JC Penney’s initial slump.
If you listen to Ackman there’s a great deal to be hopeful and he has showed excellent results in past activist campaigns. JC Penney is a difficult firm to completely change as Ackman’s discourse on employee culture makes obvious.
Ackman is trying hard to save JC Penney and in the days since Ron Johnson took over the firm has begun a transformation from the core out to each establishment. The company is changing and there is downside protection in the form of its retail base and a high cost base that is currently being combated.
There’s a lot to do at JC Penney and it’s going to take a lot of time. It might fail but Bill Ackman is clearly in charge and he hasn’t given up on it yet. His confidence in a firm has been a positive swaying factor in the past but JC Penney’s results have been too bad as a result of the transformation.
Because we’re dealing with Bill Ackman, the real test will be the final quarter of the year for JC Penney. If Ackman says the firm needs time to transform a little leeway can be given.