What About Bill Ackman's Other Consumer Position

Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Bill Ackman's Herbalife (NYSE: HLF) short is getting a lot of attention off late. Although Ackman was able to crush Herbalife's stock price from $42 to $24 in just three days after disclosing his short position, the stock has recovered most of its lost ground. A lot of hedge fund managers have taken opposing bet and the most prominent hedge fund manager among them is Dan Loeb of Third Point LLC. If reports are to be believed, Dan Loeb also took an opposite bet on Ackman's huge long position in JC Penney (NYSE: JCP). Although Ackman is patiently holding JC Penney despite of its steep price decline, Dan Loeb (if the reports are true) has already made a good amount of money from his short position.

In this article I am take a brief look on JC Penney. The company is struggling to revamp its image as an old-fashioned department store into a branded store outlet. I do understand that such transformations take a significant amount of time and effort. However, this makeover strategy is costing a lot more than expected as reflected in declining shoppers and falling cash balances. It’s really tough to guess how long the company will take to carry out its transformational policy and whether the investors will be patient till then. One thing in particular which is worrying is poor performance of JC Penney's online platform.

During its last quarter (3Q12), the company's Internet sales via jcp.com saw a sharp decline of ~37% y/y to ~$214 million. This is an important issue given the increasing shift in preference of younger population toward online shopping. J C Penney is putting a lot of efforts to improve its online sales; however it is falling at in these efforts with respect to its peers. The company is currently running a sale of 30% discount on selected outerwear on its online platform that was its response to the rising competitive pressure online. This remains a concern area for the company as its two main competitors Kohl's (NYSE: KSS) and Macy's (NYSE: M) are playing a safer bet with good performance in their online segments. 

Kohl's Corp provides online shopping through its website Kohls.com. It is among those retailers that have opened their largest online distribution centers. The company is coming up with various exciting offers in its stores as well as online to improve its sales for higher profitability. It recently announced a Dream Receipt campaign in all its stores and also on Kohls.com. Under this campaign, the company picked up one winner every day randomly and paid for the winner's entire purchase that day. It has ~23000 winners till date and has created a joyful experience for its customers in this holiday season. This will surely help the company post good sales figures along with improved customer loyalty. Another thing which I like about Kohl is that it is one of the low cost operators in the retail industry. It is constantly keeping its SG&A expenses low, which leads to a good profit margin of ~6%. 

On similar lines, Macy's is also benefiting from its online shopping platform macys.com. The company handled around 60k orders on one of the busiest days in this shopping season. It is planning to increase that figure to three times in the next two years. To achieve an improved supply management for its online customers, the company recently opened a distribution center worth ~$150 million which can stock ~1million shoes at a time. This center will help Macy's to ensure a better delivery process which can further improve profit margins. Also, the company is adding distribution facilities for its online orders to its existing stores too. Already 292 out of its 800 stores have this facility and the company is planning to add another 200 stores to that list in the next year. These moves will give an opportunity to Macy's to compete with the e-commerce giants such as Amazon in an effective way. 

Turning back to J C Penney, the company is resorting to heavy promotional activities to increase its store-traffic. This is the only one factor which I feel is giving a slight optimism to the investors. The company is planning to pull-back its turnaround strategy in 2013 based on its performance from more aggressive promotions. It issued a new 'friends and family' discount which offered an additional 20% off and some heavy discounts on winter wears. With a few exceptions, items were on sale in almost all the segments. While these promotions look sensible in the current retail scenario, they can cause a big dent to the company's margins. This could smash the company's plan of ~$900 million of savings in SG&A expenses. I remain extremely cautious on this move, as this will also have an effect on the operating margins of the company in the next results. And, at this moment J C Penney cannot afford to lose out on its profits because of these increased costs.

To sum it up, I feel the turnaround strategy for J C Penney is a long process and the issue here is that the shareholders are already running out of patience. The company is not performing well and the near-term prospects look gloomy. The company requires heavy capital expenditure to transform its business completely. However it is already facing a risk of declining cash balances and the current promotional activities will further deteriorate the situation. I don't question the company's strategy for improving its shop performance, but I am also looking for some serious signs of stability that seem to be missing!


ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own

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