The investing lesson of J.C. Penney

Many value investors thought a new CEO could turn around an old-time retailer in a changing industry. They were wrong.

By TheStreet Staff Aug 9, 2013 12:41PM

thestreet logocopyright Siri Stafford, Photodisc, Getty ImagesBy Jonathan Heller


The J.C. Penney (JCP) saga continues, and it's not an uncommon story.


The old-time retailer where your grandparents probably shopped is trying to regain some of the relevancy it enjoyed during much of its 111-year history.


Unfortunately, that's a tall order. Just ask anyone you know how often he or she goes to the mall and visits the local Penney's. I'd be surprised if you get many responses in the affirmative.


It was just a couple of years ago that my brethren in the value crowd were touting the company as a must-own name.


That's when Ron Johnson, former Apple (AAPL) retail wiz, took over as CEO.


Based primarily on the belief that Johnson could single-handedly turn around the company, investors bid shares up from $24 in August 2011 to about $43 by the following February. I called that gain the "Ron Johnson premium."


Johnson would not only make a great CEO, many said, but he was also a true believer, putting his money where his mouth was. In fact, Johnson coughed up $50 million to purchase 7.3 million 7 1/2-year J.C. Penney warrants that he had to hold for at least six years. The kicker was the strike price: $29.92. If Johnson was willing to take such a risk, many believed, in which he could lose $50 million if the stock did not perform well, that was good enough for them.


jcp chart

Of course, the story did not quite work out as planned. Same-store sales plummeted, and Johnson was gone by this past April. Now the hunt is on for a new CEO, one that can "really" turn the company around. The quest, of course, is being driven by Bill Ackman, whose firm is Penney's largest shareholder.


It was Ackman that had the value crowd so riled up about the company in the first place. To his credit, Ackman has been a wise investor in many cases over the years, but this one has been a debacle so far.


As a frequent attendee of the Value Investing Congress, I saw the presentations on J.C. Penney firsthand, and was enamored by the company's vast real estate holdings.

But the overall story and the premature praise given to Ron Johnson rubbed me the wrong way. It reminded me of the love affair that some value investors had with Sears (SHLD) and CEO Eddie Lampert, another situation that has not worked out as expected, and one that I thankfully did not participate in.


shld chart


The investment lesson here is that you cannot put too much faith in one person, a CEO in this case, to turn around a struggling business, especially a mall-based retailer that is not relevant to anyone younger than 60. Although J.C. Penney does need a new CEO, it needs much more than that to turn around. I'd suggest starting with a name change, something memorable, something snappy.


I'm not saying there's no value in the stock at this point; the company owns more than 400 locations, which is the one reason that I'm not as concerned about the $3.8 billion in debt as some may be.


At some point, once everyone else gives up on the stock, I might take another look. It would not be the first time I've purchased a down-and-out retailer, but the price has to be right.

Once the market has given up on a name and priced it for much less than its true value, even small steps of progress can be rewarded. But for now, the dust needs to settle.


At the time of publication, Heller had no positions in stocks mentioned.


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