Tuesday, March 05, 2013

“The New JCP”: Insider Sells, Chumps Buy

 The most inadvertently amusing rumor we’ve heard since—well, since the rumor that Richard Schulze had plenty of backers to lever up Best Buy (reported repeatedly, and wrongly, by the Minneapolis Star-Tribune, as detailed here)—was today’s breathless rumor that JC Penney was either going to be put up for sale, or its CEO Ron Johnson, who lost his considerable Apple-related mojo trying to turn around the aging department store chain, was going to be fired.
 Here’s how Briefing.com reported it at 3:11 p.m. E.S.T.:
 J.C. Penney seeing pop higher on volume  (15.35 -1.38)
Move being attributed to speculation that directors could push for sale of company or push to replace CEO.
What made this rumor so amusing is the fact—apparently oblivious to the rumor-mongers trying to pump up their stock—that one of the very same directors supposedly pushing for sale of the company had just sold 10 million shares of his company’s JC Penney stock in a “get-me-out” kind of trade you don’t see very often, especially from insiders. 
 According to Bloomberg, Deutsche Bank handled the block after market close last night for Vornado, whose CEO, Steven Roth, is one of the JC Penney directors most responsible for bringing in Ron Johnson in the first place.  (And they handled it very well, at that, getting $16.40 for shares whose last trade on today’s close was not quite $15.)
 What makes the Vornado sale even more interesting than just being a honking big insider sale is that Roth’s presence on the JC Penney board provided support to JC Penney’s shares through all the ups and downs (mostly downs) of its turnaround.
 After all, with Vornado one of its biggest shareholders and Roth one of its biggest-mouthed and most money-making directors, Penney shareholders could ignore $4 billion of annual sales and $2 billion of gross profit dollars evaporating while customers fled to Macy’s and Target, by daydreaming about a happy ending: to whit, that JC Penney would turn itself into a high-P/E REIT like Vornado, and shareholders would live happily ever after.
 One more thing that made the sale interesting is that Vornado didn’t need to sell.  This wasn’t a margin call like the Bass Brothers’ sale of Disney stock a couple decades back (look it up, kids), or, more recently, Aubrey McLendon’s 2008 margin call in Chesapeake.  No, Vornado appears to have wanted to sell.
 Now, we here at NotMakingThisUp don’t think the whole story at JC Penney (or “JCP” as its new overseers mistakenly took to calling it in ads despite the fact that the target JC Penney customer has no notion of stock tickers) is that Ron Johnson alienated a whole bunch of customers, many of whom may never come back.  We think the whole story would also take a hard look at what happened before he arrived, and how, exactly, the previous management team ran the thing before Ron Johnson even walked in the door (big on share repurchases for Wall Street types, short on reinvestment in the business for the customers).
 Still, the idea that JC Penney will now be sold—after a key insider, who would probably know if something was brewing, takeover-wise, blew out 10 million shares of stock—makes this the most amusing rumor we’re heard since the Best Buy nonsense.
 What we really have here is a case of massive insider selling, and what looks like chumps buying.  
 And a whole lot of ‘em, at that.

Jeff Matthews
Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2012)    Available now at Amazon.com

© 2013 NotMakingThisUp, LLC
The content contained in this blog represents only the opinions of Mr. Matthews.   Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.  This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored.  And if you think Mr. Matthews is kidding about that, he is not.  The content herein is intended solely for the entertainment of the reader, and the author.


Jeff Matthews said...

We have a "no Yahoo-message-board-style-comments" rule here at NotMakingThisUp.

If you can't write with proper English and with facts, it won't get posted. Those are the house rules, and always have been.

So don't belly-ache: just write clearly, with proper punctuation and logic on your side, and spare the vitriol.


Anonymous said...

My biggest issue with your article is the 'excuse' you make of blaming previous executive leadership.

The previous leadership led JCPenney through the worst recession since the Great Depression, making a profit every year, and paying a dividend every quarter.

2010 was a record profit year for JCPenney. It was then that Ackman and his lackey Roth got interested in JCP. Their takeover moves distracted the executives, but we were still profitable in 2011 (despite RJ taking over before the holiday season in 2011, and despite a general 'directionless' feeling starting after Q1 of 2011).

This failure is completely, 100%, owned by Ron Johnson and Bill Ackman. Of course, they are unlikely to ever be held accountable for it.

Jeff Matthews said...

All true, as far as the numbers go, but under the surface JCP was much sicker than appearances. Just look at the surplus inventory sitting around (unaccounted for) in DCs and the lack of systems to run a modern retailer.


Cheesehedge said...

So far this seems to be a case of the Buffett dictum that when a good manager and a bad business collide, it is usually the reputation of the manager that suffers.

I agree that JCP was a fundamentally sick business before Ron Johnson arrived, and that his predecessors were in effect eating the seed corn for years.

It remains to be seen whether customers will buy into the RJ vision, but don't you think he has a better shot at making this work than the clueless folks at Sears? I well remember your criticism of the SHLD management for attempting to save money on store lighting- a mistake no one will accuse RJ of making.

It may kill the company, but I admire RJ for alienating the core customer and taking the pain to push JCP where it needs to go. It seems like the classic case of the innovator's dilemma problem, where by attending too closely to what you think your current customers want, you foreclose future opportunities. GM spent too many years selling plush, ugly cheap Buicks to geriatric customers because that is what the "core customer" wanted. Now GM makes Buicks people will actually buy, but one could argue they should have taken the risk and the cost to run off the core Buick customer that was killing the brand long ago.

The sad thing is, I think Ron Johnson is right. He is showing immense managerial courage and vision in pushing a truly transformative strategy that amounts to something more than the usual PE/ hedge fund recipe of cost cuts, financial engineering, and dividends+ buybacks. If he fails I think it will send a discouraging and destructive message to America's managerial priesthood- don't do what is right or difficult (a la Steve Jobs etc.), but what won't get you fired.

This stock is likely to take a tour through the single digits as the true believers capitulate, but I hope for America's sake that Ron Johnson pulls this off. As a smaller, more focused retailer earning average department store margins, JCP could still be worth $70 a share some day.

Jeff Matthews said...

I agree: at least Johnson tried, and his basic idea idea was correct. The old department store model (fake starting prices, fake 'bargains') will no longer work in a price-transparent world.

But he moved too fast. The Penney's shopper likes to think she's getting a bargain. You don't turn her off. You keep her coming while you change your sales M.O.

Recall (most readers are too young to remember, but what the heck) how long it took Barney's to change from a men's discount store ("7th Avenue and 17th Street--free parking, free alterations" was the radio ad on WNEW-FM) to a high-end, Bergdorf's type business.

Still, I give him high marks for trying. The scary thing for other department stores must be how $1 billion of sales evaporated without a whole lot of benefit to everyone else, except on the margin. It tells you there's more to come.


Anonymous said...

Jeff I love your blog and the replies too. You are great writer and have some smart readers too. More please

Jeff Matthews said...

Well thank you. We aim for quality, which means the quantity suffers...but that is much appreciated: it gets the synapses fired up.


Anonymous said...

I have over 40 years in wall street both as banker,broker etc.and find this to be a very good take on JCP.
Some times the smart money is not so much.I believe there some value here but not sure where but a small long with a covered write(way too high premiums) might be a fun way to play.
This will be a traders dream when all the noise stops as shorts are now in control.

Jeff Matthews said...

For the record, NotMakingThisUp has never commented on a stock's valuation, positively or negatively.

In this case, we pointed out a material event (massive insider selling) that appeared to be ignored by wishful investors.

Since this column appeared, a far more informed (and scary) view on the "JCP" turnaround was offered by one of the real geniuses of American retailing, Alan Questrom, via Bloomberg.