It should be no surprise that J.C. Penney delivered a dismal quarterly report. But investors must remember that the ailing retailer is knee deep in a complete renovation of its business from the top to bottom. This involves alienating some old customers in effort to gain new ones. It involves changing decades-old stores into modern and attractive new ones. This was never supposed to take only six months or a year. Down 50% this year, J.C. Penney offers the world it's best sale yet: it's shares.
The definition of bad
It would be an understatement to refer to J.C. Penney's (JCPN.Q) third-quarter earnings as "bad." They were really, really bad. I figure it would be appropriate to start at the bottom, with a net loss of $123 million, or $0.56 per share. After excluding some one-timers, the loss sinks down to $203 million, or $0.93 per share.
What horrified investors and analysts the most, however, were same-store sales. For the third quarter, comps were down more than 26%. This is about as far as same-store sales can sink without putting a barricade in front of stores open for more than one year. It was this number that completely depressed former CNBC commentator-gone-mad Jeff Macke to declare jcpenney a dead entity. In an interview on Yahoo! Finance, Macke, in his typical over-the-top style, railed on the company's comps, and completely shut down the efforts of CEO Ron Johnson to turn the stores around.
At the moment, you can probably fit all of the J.C. Penney bulls in a Volkswagen, but is this just another case of market myopia? If so, shares are approaching fire sale prices, so let's take a closer look.
Mid-process
As mentioned earlier, J.C. Penney is in the midst of a tremendous transformation. When former Apple (AAPL 0.52%) retail chief Ron Johnson stepped into the picture, it was the hopes of many that the depressing department store would take on the appearance of some foreign relative of the now-iconic Apple Store. But, with quarter after quarter of declining sales, many of those hopes have turned to dust, leaving a precious few believers.
There probably aren't too many people who want the company to succeed more than Bill Ackman, the activist investor who sits on the board, and owns a nice 20% stake. On CNBC this week, Ackman made his case to a seemingly agitated panel, who couldn't seem to get more than a few words in between Ackman's pitch. And, to his credit, the investor made a great pitch.
The story is that there are two companies here. One is J.C. Penney -- an old, dying department store that cannot be saved. The other is a start-up -- the new J.C. Penney. This start-up has grown, in Ackman's words, from zero to seven million square feet since it began in August of this year. The old J.C. Penney has sales per square foot in the low 100s. The new one is averaging $250 per square foot.
Most of us are aware of the new concept -- stores within a store, but even I was surprised to hear just how many stores are planned to live within jcpenney's walls. In three years, the goal is to have 100 stores within your neighborhood J.C. Penney. Ackman describes the average mall goer as someone who walks through the mall and visits around four stores from beginning to end. This person covers a lot of real estate, and has great power over what he or she subjects himself or herself to. The end version? J.C. Penney will be an entire mall's worth of goods in a very concentrated area, complete with food stands and walking paths. This is Ron Johnson's vision of the company, and Ackman appears to fully believe in it.
Is it possible?
It may be hard to picture, given the current status of the company. Even Ackman admits that if same store sales fall 40% year over year that the game is up. But, if they can stabilize the falling sales, and continue to leverage the company's 111 million square feet of retail space into this new "start-up," then this could be of the most interesting retail turnaround stories of all time.
In the meantime, you can buy J.C. Penney shares today for under $17 per share. That's well below Ackman's average purchase price of $25. This is, as it always has been, a long-term story, folks. If you think the talent that created the highest earnings per square foot retail operation in the world can do it again and on a much bigger scale, or if you are comforted by the unyielding faith of one of the greatest value activist investors around, then this may be as good a time as any to pick up these priced-for-death shares.
