Should Penney Go Private or Make a Real Estate Play?
J.C. Penney is in trouble on Wall Street and pretty much any street where it does business. It’s understood that the company has had a series of missteps since Ron Johnson took over as CEO of the company, and whether it’s him or (as many have suggested) someone else in charge of getting the company turned around, it will take some time. That brings us to recent suggestions that the company buy some time by, for example, being taken private by Bill Ackman’s Pershing Square Capital Management and other equity firms or that it spin off its most valuable properties into an REIT (real estate investment trust).
According to a Bloomberg News report, Mr. Ackman, the largest shareholder in the department store chain, has seen the company’s stock price drop 48 percent in the more than two years since his firm made the purchase. The other major investor in Penney, Vornado Realty Trust, recently sold off more than 40 percent of its shares in the company.
"If the business keeps going in the direction that it has been going, the major investors will have to find an exit strategy," Bernard Sosnick, an analyst for Gilford Securities, told Bloomberg. "Vornado has already taken the first step."
There is real concern in Wall Street circles that Penney is bleeding cash. Recently, Dow Jones Newswires reported that CIT Group would begin adding a one percent surcharge on all invoices to Penney over concerns about its financial status. Penney reported it had $930 million in cash at the end of February rather than the $1 billion it had projected it would have in November.
In another Bloomberg report, Omar Saad, an analyst at ISI Group, said Penney should take its 300 top stores and spin them off into an REIT. Mr. Saad said a separate company managing those locations could be valued at about $40 share.
"JCP’s most valuable asset is its low-cost real estate, and we believe there are many premium brands that would potentially be interested in subleasing space within the best locations," Mr. Saad wrote in a note to investors.
Discussion Questions
Is going private or creating an REIT what Penney needs to give it the time to get turned around? Is time Penney’s biggest issue at the moment?
I’ll tell you, they need to do something. When you can’t even convince Caribou Coffee to believe in what you’re doing—they just announced they’re not actually going to open kiosks in JCP this morning—then it’s time to get really worried. Some people are abandoning ship already, and next month’s same store sales target is a soft number—the first year-on-year number of Ron Johnson’s leadership, I think. If they miss that….
I don’t know if a REIT is the way to go—if it is, it may need to come with some strings on the strategy overall. I was in JCP this weekend specifically to check out what was going on. Joe Fresh was a non-event in my neck of the woods. And now the store looks more like it’s trying to compete with Urban Outfitters than with Macy’s or even Kohl’s. Walter Loeb has been going on about how Joe Fresh is not on target for JCP customers, and I have to agree. In fact, I don’t think JCP knows who its customer really is anymore. A REIT’s not going to solve THAT problem.
Going private might have been a smart idea for JCP at the beginning of 2012, to take the spotlight away from the company’s quarterly results while it began its “reinvention” process. It might also have preserved some of Ron Johnson’s credibility, which has been eroded by his upbeat pronouncements to “the street” in the face of terrible numbers.
I’m no financial expert, but at this point going private would be a question mark. Can the company afford to be saddled with more debt through an LBO, given its weakened operating model? (Low sales, high expenses, poor margins.) And would investors who bought into the vision (at $20, $30 or higher per share) support going private at such a depressed share price? (Again, I’m sure that other panelists with more expertise will weigh in on this idea.)
As to a REIT spinoff, this has echoes of what Bill Ackman tried to engineer with Target several years ago. If the top 300 doors are the only ones worth salvaging, is the company worth saving—or are the high-volume locations the key attraction in an acquisition?
If it means they go away and we don’t have to talk about them any more, I’m all for it. They are looking very “Montgomery Wards-esque” right now. Turning around? I think that ship sailed. Walmart and Target won that battle.
Time is money and J.C. Penney is running out of both. A close inspection of any retailer’s business over the past several years will clearly demonstrate the cause of the problems at hand. I would be careful placing any retailer’s “low cost real estate” as a valuable asset. Location is still a very important part of getting consumers in the door(s). Most of the low cost retail real estate is low cost because of surrounding social economic depravity, poor visibility and of course poor accessibility. When one or more of these conditions exist the better description would be “toxic asset.”
Companies that surgically remove the poorer performers in order to create a winning investment often carry over weighted average asset information into the new prospectus as a reference or reminder for the purpose of further stimulating and maintaining heightened interest. If this is not disclosed or discovered prior to a commitment, the investment may be catastrophic for the new ownership or investment banks. Distractions do cost billions of investment dollar loses in sure fire schemes and deals of the century. Or so the stories go.
What’s really depressing about the JCP story is that there are lots of retailers that need a head-to-toe makeover, and now they may be gun-shy about doing it. But it’s time. You retailers with the cluttered sales floors, the too-loud music, the complex promotions—you know who you are.
It’s hard to come out and say that the Penney re-invent is a disaster when so many great minds of retail and finance are backing it. But, I think it’s a disaster! Selling jeans via an iPad bar without adequate staff is no way to sell jeans! The addition of Joe Fresh is not speaking to the JC Penney customer.
They need to step back and reassess what they are trying to do in the context of who their customer is, not who they wish their customer is. Unfortunately, no, I don’t think there’s time.
Time is not the problem. The strategy of attracting millennial shoppers and creating a loyal following from that group has not materialized. The initial strategy generated some interest among Millennials but the product offering and service was not enough to create a large loyal following among Millennials. Meantime, that strategy alienated their traditional loyal consumers. Many of these consumers have moved on and are not attracted by products and services aimed at Millennials. That leaves the company with very few loyal consumers.
Winning back traditional consumers and winning a loyal millennial following require two different strategies. JCP is now stuck in the middle.
This question is assuming that Penney’s can be turned around.
Mel makes a strong point when he says we are assuming Penney’s can be turned around. We have had this on our plate for several years. The only change of consequence has been the few new CEOs. When a ship is sinking, no CEO, even Ron Johnson who has made a valiant effort, can stop it. There have been many management changes over the past year with most leaving and being replaced internally by lower salaried people taking on the additional responsibility.
Yeah, that’s JUST what they need: more cookie-cutter ideas from the brain trusts that brought Mr. Johnson onboard (to set the throttle in reverse…at full speed.) For those not familiar with the past 6-7 years, a review of JCP’s 10k is instructive: what you have is a company whose major competitors were either collapsing (Sears) or commoditizing themselves into a clone of what JCP had once been (Macy’s), and whose performance was lackluster—as were most of its peers; but it’s sales still mirrored the overall economy—more or less—and it was still profitable (imagine a novel concept like that!) So to “correct” this situation, we had the meddling of “activist investors”… which has produced the results of the last 18 mos.
Does anyone on this board really think there is any hope with these same people still meddling, or much more hope—now that the damage has been done—if they leave?
First things first. JCP needs to stick to the knitting, not be drawn offside with thoughts of going private or REITS.
Johnson and his team will get it right, mainly because they are smart and open minded, but they haven’t got the time/money to make many more major mistakes.
The biggest issues are clearly less than effective management and an inability to engage new customers.
Given that either of those issues is a chain-breaker and the options aren’t pretty. Going private doesn’t solve the problems, so if it’s a binary choice I guess I’d have to be in favor of a REIT—but that’s not a really good answer either.
Penney needs to find and embrace an exit strategy. Part of this should be selling off its real estate holdings to generate more cash, and closing poor performing stores. This can be done rapidly, and may stop the continuing fall of the stock, thus buying management more time to “save” the company, if that is even a reasonable possibility.
I am stymied at watching the train on fire that JCP has become.I was really sorry—REALLY sorry—to see Mr. Ullman retire. I was very scared of Mr. Johnson’s plans initially. I figured incorrectly that after a year of the “new ideas,” that those in charge would see their errors and change course. I am VERY disheartened that this group has taken a solid store, liked by its customers, and successful in a difficult market space (in the near past) and emulated by others in its level of competition, and has now destroyed that institution.
I am glad that Sears is STILL open and I can’t believe that Kmart is STILL open (not that Kmart is a competitor to JCP). But I NEVER thought I would see the demise of JCP—at least certainly NOT before Sears! I am afraid that JCP is lost due to ongoing bad decisions and ego.
Selling off some stores and CLOSING underperfoming stores is a good idea if it really does provide cash for time, but CONTINUING on a failed course will lead to one end—FAILURE. A true shame.