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Please post your question rather than email directly to me (unless you do not get a response within two days) because (1) Other readers probably have similar questions and (2) your email may go into spam or be overlooked.
Don’t be embarrassed. If you ask, “What is a balance sheet?” I won’t give you the answer but I will tell you where to look and how to learn on your own.
I’ve mentioned this before but I’m an avid reader of the blog. I’m currently going through your old posts one by one and learning a lot. Yours is one of 2 or 3 other blogs that I am reading the archives.
My question is about arbitrage (tenders and merger arb). I’ve been reading through Buffett’s old letters and in the late 1980’s he had quite an impressive run with his arbitrage investments (I think in 1987 he made around 80% on his arb investments).
Both he and Graham seem to have had long time success for decades using merger arb and other arbitrage techniques. Buffett mentioned in one of his letters that during the 63 years that Graham, Buffett LTD, and Berkshire practiced arbitrage, they made 20% annually on that strategy.
I’m wondering how often you employ any of these strategies in your portfolio? I’m also wondering if it’s more valuable to spend time working on tradition valuations of companies before treading into this highly specialized area? I think you mentioned you look for liquidations when the market gets too high, which I would group into this special situations category. It seems like a specialized area, but also seems like an area that would add uncorrelated returns to the portfolio, and serve as a great substitute for cash when markets begin to become overvalued.
Would love to hear your thoughts on merger arb if you have time… Thanks
First, you should learn about arbitrage because all investing involves some form of arbitrage. Typically, the average investor takes an immediate to 6 month view but value in equities must be measured over the company lifetime (equities are perpetual securities) so value investors use time arbitrage to benefit. Also, spin-offs are one area to find uneconomic selling. Pursue your studies.
Read Klarman’s book Margin of Safety, Greenblatt’s Genius Book, Berkshire’s letters and then look at past deals. Then go where you have the least competition–micro-caps going private, liquidations, etc. Oddball Stocks is one blog and there are others to learn from.
I am opportunistic, but I have found over the past few years there has been so much money with low-to-zero interest rates competition that the spreads have been too narrow. Then when there were deals like Burlington Northern buyout from Berkshire back in 2009, the spreads were OK–18% annualized but at that time you could buy MMM at or under $50.
Pursuing merger arb depends upon your opportunity set. Also, don’t compete against the big trading desks on Wall Street–it isn’t worth the risk/reward.
I had a successful merger arb in Burlington Northern but I took my eye off ball in not investing more in the obvious. If I bought around $50 to $55 per share, today I would have a 5% growing dividend yield and a double plus tax deferral.
Today, I feel the environment for many stocks is like this:
However, there are sectors like small gold and silver mining stocks that are in a huge bear market–and for good reasons–but there are opportunities in the areas with the most hatred and plunging prices. Meanwhile the mania in cloud stocks like CRM continues.
There have been companies like NVDA and Intel that offer a more than fair price, but risks are higher than owning a NVR or SYK in the $50s. My first goal is to find compounders–franchises that can compound capital over time (rare), then buy franchises at slight discounts (20% to maybe 30%) and sell when the margin of safety disappears like today with NVR. Then I look for special situations or net/nets.
You have to be flexible and go where you find opportunity but understand the drawbacks of each approach and your own limitations. So recently, I have few special situations in my portfolio but that shouldn’t stop you from pursuing special sits. Just know why you have an edge.
Human beings are subject to wild swings
in their levels of fear, risk tolerance and
greed. That won’t change. I base my
whole approach on buying when others
are fearful and selling when others are
greedy. The reason Shakespeare is so relevant
still today is that his plays were all
about human nature, and human nature
Mark Sellers, 6.19.05
In the folder below there are interviews with hundreds of money managers. Try to find ideas that are relevant to your style.
JCP dropped below $17 for about a 20% decline. More than 15% of its float has traded in less than 24 hours. 30% of the float is short.
Where to find maximum pessimism and hatred:
Here are the headlines.
“Simply stunning results” from J.C. Penney (JCP), says Tiburon Research’s Rob Wilson, quickly…
Wednesday, February 27, 4:58 PM ET
Sales Sink, Stock Gets Hammered in After-hours Trading (Reuters)
Feb. 27, 2013, 4:44 PM More on J.C. Penney’s (JCP) Q4: No sigh of relief for investors just yet as the firm reports comparable store sales fell 31.7%, below the consensus call of -26.9%. Customer are fleeing, but no give up from CEO Ron Johnson: “…we are energized by our shop roll out plans.” Gross margin was crushed, falling to 23.8% of sales vs. 30.2% last year. Internet sales slumped again, losing 34.4% Y/Y just marginally better than last quarter’s 37% nosedive. Cash position $930M at end of Q4. No guidance is issued, but the retailer says it will open 20 shops geared toward home products in 505 stores with brand partners. JCP -4.4% AH. (PR) Read comments
· Shareholders need to revolt aggressively (Yahoo poster 6 PM 2/27/13)
The Board needs to fire Ron Johnson tonight. They need to then hirte a trustee to rebuild it and then resign en masse for hiring this imbecile. First rule of retail: Don’t f it up! Kill the BOD and Johnson NOW.
Ron Johnson couldn’t sell pus*y to a troop train. How many times will we sell retailers fail due to hiring rock star leadership who is so arrogant to turn away from the existing customers without attracting any replacements? Just desserts Ron. Eat #$%$. Ron is a $%^&*! piece of $%^&!
Where is the class action shareholder lawsuit ? Will RJ fly home tomorrow on the corporate jet ? Will he still be racking up insane bills at the Ritz ?
Can you feel the love? Yes, investors are upset, but do you read any deep analysis as to the value of the company?
What happened in this situation–Dillards (DDS)? Perhaps a case study is in order. Ron Johnson is a genius at $40 and now at $17 he receives death threats. I have never seen a turn-around take less than 36 months. Let’s check back in 2014.
Dillards monetized some of its real estate assets through a REIT.
I am not implying that JCP should do the same, but I recon there is a reason JCP has not dropped below $14 per share even in the dark days of 2009. Can the massive hate and fear take us to new lows? Not, if it doesn’t happen in the next month.
Stop the presses! Before reading Longleaf’s valuation of Dell (linked below), go to the 2009 and 2013 Value-linesand value Dell with a back of the envelope calculation using a post-tax free cash flow yield as one signpost.
What do you think Dell is worth—about? What do you think of the valuations mentioned in this article? Does growth have value? Why or why not?
Do you have any criticisms? What in Michael Dell’s prior history makes you (perhaps) not surprised by his current actions? Would you have factored that into your pre-announcement valuation? How? Should Dell offer to do a Tender Offer for the shareholders? If the price callapsed to $9 or $10 based on the deal being pulled what would you do?
I am having difficulty finding value, so now I gotta go small. More on micro-cap investing…..Liquidity as an Investing Style and Microcap_Investing and then More_on_Microcap_Investing. If you can accurately value a business while the company’s stock price is volatile, then you have a gold mine. Smaller companies tend to be more OVER and UNDER-VALUED than larger, well-known names.
Secrets and Lies of the Bailout
The federal rescue of Wall Street didn’t fix the economy – it created a permanent bailout state based on a Ponzi-like confidence scheme. And the worst may be yet to come
So what exactly did the bailout accomplish? It built a banking system that discriminates against community banks, makes Too Big to Fail banks even Too Bigger to Failier, increases risk, discourages sound business lending and punishes savings by making it even easier and more profitable to chase high-yield investments than to compete for small depositors. The bailout has also made lying on behalf of our biggest and most corrupt banks the official policy of the United States government. And if any one of those banks fails, it will cause another financial crisis, meaning we’re essentially wedded to that policy for the rest of eternity – or at least until the markets call our bluff, which could happen any minute now.
An excellent article that shows what has happened to our centrally-controlled, socialist, Ponzi financial system. Of course, the author does not point out the causes or remedies, but he does show the results of the bailout.
My favorite line:
We thought we were just letting a friend crash at the house for a few days; we ended up with a family of hillbillies who moved in forever, sleeping nine to a bed and building a meth lab on the front lawn.
Based on its strong financial performance, Herbalife is a classic “compounder” – a well-managed company that sustains consistent top-line growth, has a leading market position, and steadily increases margins, earnings per share and free cash flow while demonstrating shareholder-friendly behavior. …Led by CEO Michael Johnson, management has also used the company’s ample free cash flow to de-lever its balance sheet and shrink the share count by nearly 25%. This type of steady non-cyclical growth is hard to find and puts Herbalife at the head of the compounders’ class.
With results like these, the case against Herbalife rests on a bold claim that the company is a fraud. The short seller’s lengthy argument against the Company can be boiled down to three principal smoking guns: the first, a claim that Herbalife has been operating an “illegal pyramid scheme” under the nose of the Federal Trade Commission for the past 32 years; the second, that Herbalife’s loyal customer and distributor base has been exploited and harmed despite the low number of consumer complaints and generous company return policies; and the third, a claim that Herbalife’s products are commodities sold at inflated prices not supported by sufficient levels of advertising or R&D.
Taken in reverse order, the third claim misses an essential truth that invalidates the indictment. No one believes Starbucks is a scam because you can buy a cheaper cup of coffee at your local bodega. A key contributor to Herbalife’s growth has been its distributor-led “Nutrition Clubs”, where consumers can purchase single servings of the Company’s signature beverages. The short seller’s assertion ignores the significant value customers place on every consumer brand and its community “experience” – whether at a Herbalife Nutrition Club, a Starbucks, or a corner bar. The markup is merited by community and brand identity, not by the commodity itself.
(Editor: in disclosure, I am long HLF but not as aggressively as Mr. Loeb. Is HLF a franchise because of its brand? But a brand has no meaning unless there is customer captivity. Does HLF have customer captivity?)
The second claim seems similarly dubious. The FTC, by all accounts, receives a very low volume of complaints annually about Herbalife – fewer than forty per year. ….The Company repurchases an average of only 1% of sales volume pursuant to this policy. It is difficult for us to understand why the buyback volume would be so low if there are in fact so many unsatisfied consumers and distributors who presumably would not hesitate to be reunited with their cash.
The pyramid scheme is a serious accusation that we have studied closely with our advisors. We do not believe it has merit. The short thesis rests on the notion that the FTC has been asleep at the switch, missed a massive fraud for over three decades, and will shortly awaken (at the behest of hedge fund short seller) to shut down the Company.
Applying a modest 10-12x earnings multiple suggests Herbalife’s shares are worth $55-$68, offering 40-70% upside from here and making the company a compelling long investment for Third Point.
Herbalife Battle: Great Theater, Terrible Trade By Jeff Macke
In the last 30 days shares of Herbalife (HLF) have gone from the mid-40′s to the 20′s and then back again. It’s a dizzying ride driven by bickering hedge fund managers taking turns in the spotlight to make their cases on the long and short sides. It’s a striking turn for an 11-year-old company with a market cap under $5 billion and, until very recently, almost no mindshare in the investment community.
For those considering getting involved with the stock on either side of the trade, the question is whether or not Herbalife is a “Ponzi Scheme,” as Bill Ackman alleges, or if it’s just another relatively boring company most investors should ignore. Value investor Vitaliy Katsenelson, chief investment officer at Investment Management Associates, says the company is probably best avoided.
“I think you just want to stay away from this fight,” Katsenelson says. He has been to Herbalife’s clubs and came away unimpressed. For one thing, most of the people were there, in his words, “just to sell the product to each other.” For another, the product itself seemed overpriced for what you’re getting. “Most people get into Herbalife not because they want to consume the product but because they want to sell it to their favorite mother-in-law.”
That makes HLF a lousy long, but is it a short? Not really. Katsenelson has done his homework. He’s been to HLF stores and he watched all three hours of Bill Ackman’s argument for shorting the company. After all that legwork Katsenelson just doesn’t see the appeal for either bullish or bearish investors.
Companies don’t just tumble to zero, they need to be pushed. Katsenelson thinks Ackman’s best chance in that regard is to create a self-fulfilling fundamental slide. If Ackman generates enough negative publicity it’s going to be harder for HLF to set up distribution centers. Failing that, the stock could muddle along with the company itself for years before hitting the wall.
“I would just basically stay away,” Katsenelson concludes. That’s probably good advice for the vast majority of individual investors.
Interview with a serial killer
To understand what drives hedge fund managers, I studied this video. Chilling but informative.
Hempton: Short-seller Went Long Herbalife Fri 04 Jan 13. The following transcript has not been checked for accuracy.
CNBC: Activist Robert Chatman battling Bill Ackman on Herbalife (see next article in this post). Herbalife’s Chairman says Ackman will lose his fight against Herbalife. But he have not the only one who thinks they will lose. Watching this battle, in his own words, says it is like watching hedge fund porn. Herb, thanks for joining us today.
Herb Greenberg: What makes him so interesting in this case is that he is mostly known as a short seller and he is buying the stock even though he agrees with Ackman. He joins us now live in our studios. John Hempton of www.bronte.com, “How are you.”
Hempton: I’m pretty well.
Greenberg: I got to ask a quick question here. yeah. You’re a short seller and you are — you are long this stock. How does that work? Why would you do that? I’m pretty familiar with scum bags. Multilevel marketing schemes are scum bags. There are a million people in their chain and Bill Ackman says Herbalife is ripping them off. Tobacco companies kill twice as many people a year as Herbalife has in its network. Those companies kill 400,000 people in America. Hugely profitable. They are scum bags but return cash to shareholders for decades. If you have shorted them, you’ve been run over.
Herbalife, five years ago, had about 140 million shares, it now has 108 million shares. It buys back stock regularly; pays a fairly hefty dividend. They are a scum bags, but they are a stock market scum bag.
Greenberg: You have to be careful with what you say here. The question is, will the Federal Trade Commission (“FTC”) go after the company? One reason you don’t believe that Ackman will be right is because you don’t believe the FTC will do that.
Hempton: You say something obviously is wrong and you think the government will rescue you. all Herbalife needs to do is find somebody who was fat and is less fat because of Herbalife and somewhere in the 2.5 million distributors there will be a few of those. Wheel them out in front of them (FTC regulators), and you are know, what Bill Ackman’s case now is that the government’s going to go and help the billionaire hedge fund manager.
Greenberg: I know another hedge fund manager here john, and he is very politically connected, very short the stock, and he believes that the heat will get turned up on this industry very quickly here. And he believes that one of the things they will be looking at is the industry itself targeting lower-income people. So what is to say that even though the FTC didn’t do this before, they don’t come back and do it now?
Hempton: I believe the same thing about the tobacco companies 20 years ago. the FTC has known about multilevel marketing schemes for decades. If this (Herbalife’s scam/cash flows) lasts three years, Ackman is wrong. If it lasts a decade, Ackman is so wrong, it’s just silly. Now this thing really has cash flow. A thesis that says, I got to wait for government is a bad thesis. I don’t know how many really dodgy companies I’ve reported to the FTC and what do they do? Sometimes they fine them. The vast bulk of the time they don’t.
CNBC: “Herb (Greenberg), I’m wondering where we go from here. I know we are looking forward to Herbalife’s rebuttal and Ackman is preparing his rebuttal to that rebuttal. What is the next chapter in the story?
Greenberg: Does this does become the equivalent of the for profit education industry where they go after it and where the industry, people said, they will never go after that industry. The government went after that and in this case you end up with a very hard reset of the business models of these companies.
Hempton: And for profit education industry case the victim is at least in part the government. the government giving stupid loans. a relatively easy way of the government reducing their fiscal drain.
Greenberg: John (Hempton), if in it case the victim is lower-income population, a lot of lower-income population and the Obama Administration could be very interested in that, wouldn’t that potentially have an impact?
Hempton: When did the government care about lower-income people in that way? Lower-income people are largely the victims of tobacco companies too. You look at tobacco, it is completely inversely correlated to wealth and income. Rich people don’t smoke. Poor people smoke. People in most jurisdictions just raise taxes from that.
Greenberg: Okay, we will see who is correct on this one. John, thank you very much for coming along.
Herbalife: Why I Made It a 35% Position after the Bill Ackman Bear Raid
This is a guest post prepared by Robert Chapman. Chapman is the founder of Chapman Capital LLC, which is a Los Angeles based investment company specializing in takeovers and turnarounds. In 2000, Chapman Capital was an activist versus Herbalife following the death of Herbalife’s founder Mark Hughes. This is an amazing article. It’s well-researched and easy to understand. If you’re remotely curious about the future of Herbalife after Ackman’s attack, the mechanics of short selling and the potential value of Herbalife’s stock, this is a MUST read. If you find this article informative, hit the +1 or Like buttons above. Sincerely, +Kevin Thompson
…REGUATORY SUMMARY: FTC has been there, done that.
The Ackman Tell. Many poker games are won and lost upon that infamous turning point when a player properly reads his opponent’s “tell.” To wit, I am confident that during an interview with CNBC’s Andrew Ross Sorkin on “D-Day” (12/20/2012), Bill Ackman slipped his “tell”, confirming my suspicion that he already realized the FTC wasn’t going to make his day by shutting down HLF. I strongly recommend all HLF traders/investors read the transcript of this interview, as Sorkin does a masterful job of fighting the media urge to genuflect before Ackman’s drawn down zipper, otherwise known as “The Whitney Tilson”.
Interview with Michael Mauboussin: Untangling Skill and Luck in Business, Sports, and Investing (From www.simoleonsense.com)
Today we’re going to talk about the role of skill and luck in generating success.
Michael Mauboussin’s Background
Michael Mauboussin, is the Chief Investment Strategist at Legg Mason Capital Management. Michael is also an adjunct at Columbia Business School and Chairman of the Board of Trustees at The Santa Fe Institute.
What role, exactly, do skill and luck play in our successes and failures? Some games, like roulette and the lottery, are pure luck. Others, like chess, exist at the other end of the spectrum, relying almost wholly on players’ skill. In his provocative new book, Michael Mauboussin untangles the intricate strands of skill and luck, defines them, and provides useful frameworks for analyzing their relative contributions. He offers concrete suggestions for how to put these insights to work to your advantage in business and other dimensions of life.
“There is a time in every man’s education when he arrives at the conviction that envy is ignorance; that imitation is suicide; that he must take himself for better for worse as his portion; that though the wide universe is full of good, no kernel of nourishing corn can come to him but through his toil bestowed on that plot of ground which is given to him to till. The power which resides in him is new in nature, and none but he knows what that is which he can do, nor does he know until he has tried. Not for nothing one face, one character, one fact makes much impression on him, and another none. This sculpture in the memory is not without preéstablishcd harmony. The eye was placed where one ray should fall, that it might testify of that particular ray. We but half express ourselves, and are ashamed of that divine idea which each of us represents. It may be safely trusted as proportionate and of good issues, so it be faithfully imparted, but God will not have his work made manifest by cowards. A man is relieved and gay when he has put his heart into his work and done his best; but what he has said or done otherwise shall give hint no peace. It is a deliverance which does not deliver. In the attempt his genius deserts him; no muse befriends; no invention, no hope.” ― Ralph Waldo Emerson, Self-Reliance
Best Advice I Ever Got from Grandpa
A Good Investing Blog
A good blog from an individual investor who has an attitude and philosophy that YOU should strive for–or at least that is what csinvesting.org HOPES you seek–independence. Remember don’t mimic but learn. My investments would be different from this blogger’s investments but our attitudes are similar. I just came across this blog this morning. Thumbs up!
My name is Lsigurd and I plan to use this blog to share the research that I do for stocks that I am purchasing in my own accounts. In the portfolio page I will keep track of my picks with an RBC practice account.
This is not my first attempt at a blog. I used to post regularly on stockhouse but I got tired of the spam on the site. I also have been posting regularly on Investors Village under the moniker of liverless. I lost interest with the format of posting on a bulletin board, and I think its time for something new.
The RBC account I will use to track my portfolio has been active since July 1st, 2011. Performance from my accounts for earlier years can be viewed here.
Who am I?
I don’t think that investing acumen can be taught. Everyone has to find their own investing personality, and the only way you can do that is by getting into the market and figuring out what works for you. I made a conscious choice to bypass the route of an MBA or CFA and to instead learn by experience. I remain convinced that the best way to learn the market is by being in the market and making mistakes.
My educational background is in oil and gas, and so I started my market education by buying a number of oil and gas stocks based on what I saw as strong fundamentals and cheap valuations (my first being a little producer called Belair Petroleum for those that remember such names). I quickly learned that in the oil and gas sector, cheap is another word for dead. Valuation is about more than numbers, and I have learned that a good story and strong prospective growth is a better value proposition than a cheap cash flow multiple.
From the world of oil and gas I expanded my area of investment based on the thesis that China was going to keep growing and that the middle class in China would evolve into consumers of refrigerators, indoor plumbing and automobiles. This thesis lead me to my first forays into base metal stocks (I owe much of my early success to the likes of Aur Resources and Hudbay Minerals), to gold (I own much of my early frustration to Apollo Gold!), and from there to soft commodities like potash (I was one of the original potash bulls on the VT.to board on Investors Village), and most recently pulp.
Lately I have expanded my investment landscape to regional banks and US REITS. Why would I make the jump from commodity investing to basically real estate (regional banks are almost all highly leveraged to real estate loans)? Because these stocks have been crushed and at some point a good value proposition is going to emerge. It’s the same reason that I keep a close eye on lumber and forestry stocks, and have been in and out of them on occasion over the last couple of years. The time for these stocks, banks, REITS and forestry, has not come yet (with the exception of a few special situation banks I am invested in) but it will and I want to be ready for that moment.
So what can you expect to read about here?
I don’t run anyone’s money but my own. I have for 10 years and I’ve done it well. I have returned to myself somewhere between 400-500% over the last 10 years, while the S&P has done nothing. I run my own portfolios and do a lot of due diligence on my stock purchases. I buy mostly (but not exclusively) microcap stocks, primarily because the value most often lies in those stocks that are not followed by many others. This can cause my portfolio to have a lot of volatility and it has led to more than a few sleep deprived nights, but such is life and I have had good success with my strategy.
I’ve had success looking for undervalued stocks in unloved but growing sectors. A lot of my success has come from commodity stocks. As this commodity bull market matures and opportunities become more scarce, I have found myself expanding to other areas; to buy some US REITs, some regional banks, and there are a few one-off special situation stocks that I have not yet bought but am looking closely at.
In The Intelligent Investor, Benjamin Graham sums up his investment philosophy by saying that an intelligent investor must be “businesslike” in approach. Investing in shares in a company is just like owning a share in a business enterprise and the investment must be approached as if one were buying a business, or a partnership in one.
There are four guiding principles for Graham:
1. Know the business
The investor needs to become knowledgeable about the business or businesses carried on by the company in which they propose to invest – what it sells, how it operates, what is the competitive environment, what are the threats and opportunities, the strengths and weaknesses.
An investor who bought a fruit shop, or a shoe factory, without investigating these things, and knowing them, would be foolish. The same applies to share investment. An investor who does not understand the business should not be investing in it.
2. Know who runs the business
An investor who cannot operate the business for himself or herself, needs a manager. This is the position of the average share investor, who owns a share of an enterprise that is run by others.
The owner of a business in this position would want a manager who will manage the business competently, efficiently and honestly. The share investor should not be satisfied with less. Unless the investor believes, through sound research, that the company is managed efficiently, competently and honestly, in the best interests of the shareholders, the investment should not be made.
3. Invest for profits
An investor would not normally buy a business that did not, on proper research, appear to have reasonable expectations of producing good profits over time. Share investors should take the same approach and buy, as Graham says, “not on optimism, but on arithmetic”.
4. Have confidence
Graham encourages investors to properly research their investments and, if they believe their investment judgment to be sound, to act on it. He cautions investors in this position against listening to others.
“You are neither right nor wrong because the crowd disagrees with you. You are right [or wrong] because your data and reasoning are right [or wrong].”
You can feel the fear, anger, and despair (visit the Yahoo Finance Board for JCP to get a feel for what small investors think), because you own the company. Whom do you blame, what can you do? The only way to stop the price from going down is to turn off your screen.
To gain a more realistic view of J.C. Penney’s prospects, however, here is the Deutsche Bank analyst Charles Grom: “Trends at J.C. Penney are obviously getting worse, not better, and we are becoming more and more convinced that sales in 2013 will also decline, which could lead to a going-concern problem next year.” (CS Editor: OK, if that were the case would the management and Board of Directors take a different course? Slow spending, sell off assets, etc. OR is the analyst just linearly extrapolating to come up with his thesis?)
The company’s stock has fallen nearly 50 percent since the beginning of the year. Even its online sales, through jcp.com, fell 37.3 percent last quarter from a year ago. Yet Mr. Johnson, a well-regarded and charismatic retailer who worked at Target before his meteoric rise at Apple, appears to be trying to mimic Steve Jobs and create what Mr. Jobs’s biographer, Walter Isaacson, called a “reality distortion field.” An opinion not a fact.
Andrew Burton/ReutersRon Johnson, chief executive of J.C. Penney, says the store renovation plan is a success. Mr. Johnson has spent the last several months trying to persuade investors that his transformation of J.C. Penney was the equivalent of Mr. Jobs’s efforts to turn around Apple a decade ago.
“You know, I watched this movie before. When I joined Apple in 2000, Apple was a company dwindling. Everyone said to me, ‘What are you doing there?’ ” Mr. Johnson told investors in September. “Apple wept through 2002 and I think sales were down 38 percent as we dreamed about becoming a digital device company. But Apple invested during that downturn. That’s when Apple built, started to build its chain of stores. That’s when Apple transitioned to Intel. That’s when Apple started its app division. That’s when Apple imagined and built the first iPod.”
O.K., Mr. Johnson, but that was Apple. And J.C. Penney is not Apple — and let’s be honest, it can never be Apple. The company doesn’t make its own magical, revolutionary products that bring tears of joy to its customers. It is a low-end department store that Mr. Johnson is hoping to turn into a slightly higher-end department store that sells clothing made mostly by other manufacturers.
Still, Mr. Johnson has sought to remake the company quickly, perhaps too quickly, by eliminating promotions and discounts, moving the stores more upscale, rebranding the company as JCP and putting in place a “fair and square” pricing model. (J.C. Penney is, however, putting on a special sale for the holidays.) Granted, JCP is no Apple, but what did Ron Johnson accomplish at Target–probably a better comparison.
Yet the renovations are hardly finished — or in some cases even started. Only 11 percent of its stores’ floor space has been remodeled with his successful specialty-store-within-a-store concept, in which he has opened up outposts for brands like Levi’s, Izod, Liz Claiborne and the Original Arizona Jean Company.
J.C. Penney may have been dying a slow death before Mr. Johnson’s arrival — some rivals used call it “death by coupon,” given the retailer’s penchant for discounts — but the company’s decline has only accelerated.
But the lessons, and successes, of the rollout of Apple stores are proving that they do not apply to Penney. While the customer experience at Apple is in a class by itself, and Mr. Johnson should rightly receive credit for that, the success of the stores was in large part a function of stunning products with a fan base that would stand outside stores for days in the rain to get their hands on them without any chance of a discount. Do you think there are customers who will ever stand outside J.C. Penney overnight for the next Liz Claiborne sweater? (J.C. Penney bought the Liz Claiborne brand last year.)
“Ron Johnson’s remake of JCP has assumed the consumer — the only one who matters — is the one who shops at Target or Macy’s or Nordstrom’s. Instead of pivoting on and strengthening the historic JCP brand (What brand?), Johnson’s decided to recreate the Target and Apple wheel, a move akin to Toyota suddenly deciding it’s Porsche. In short, a ridiculous and condescending move,” Margaret Bogenrief, a partner at ACM Partners, a boutique crisis management and distressed investing firm, recently wrote.
There is something romantic about watching Mr. Johnson try to remake a dying classic icon (So why did Sorkin call JCP a brand in the prior paragraph). At some gut level, you have to root for him. He’s making a bold bet. Transitions are inherently painful. And everyone loves a great comeback story.
Here’s the good news: In the stores that have been transformed, J.C. Penney is making $269 in sales a square foot, versus $134 in sales a square foot in the older stores. So the model itself is working. And Mr. Johnson has the support of the company’s largest shareholder, Pershing Square’s Bill Ackman, who personally recruited Mr. Johnson. If Mr. Johnson were starting with a blank slate, it might be a great business.
Mr. Ackman declined to comment. J.C. Penney did not make Mr. Johnson available.
Now here’s the bad news. Mr. Johnson still has to convert nearly 90 percent of his square feet of shopping space. That will very likely take $1 billion and as long as three years. If the sales decline that occurred last quarter accelerates, the company could run out of money. It now has about a half-billion in cash and access to a credit line for as much as $1.5 billion.
Of course, it remains possible that Mr. Johnson, who people close to him say is a realist, could always decide that the transformation is not working and change course to return to the old model of J.C. Penney and save all that money remodeling. But that would be a huge setback.
The question Mr. Johnson may be asking himself now is: What would Steve do?
A version of this article appeared in print on 11/13/2012, on page B1 of the NewYork edition with the headline: A Dose Of Realism For the Chief Of J.C. Penney.
So What is JCP worth? Forget the price today, what is the value of JCP? Since this is NOT a franchise, then this would be an asset type of investment. What is the real estate worth for JCP? I would start there and review with a critical mind my valuation of the company. Oh, and forget blaming anyone for the price being below your purchase price, perhaps or perhaps not, today is your luckiest day.