Just last week, Bill Ackman resigned from the board of directors of J.C. Penney (NYSE:JCP), after several weeks of tense and arduous disagreement over the direction and leadership of the company. While Ackman, Penney's largest shareholder, publicly stated that the move was "...the most constructive way forward for J. C. Penney and all other parties involved," his history as an activist investor likely played a role in the board's decision to adopt a so-called shareholder's rights plan. In short, this plan would make it essentially impossible for a new investor to establish a large position in the company in an attempt to take over and force change.
While on the surface this may sound good to current investors, it's really not. Let's talk about why.
Another bad quarter
The poison-pill announcement comes two days after the company reported that sales were down yet again. Now pay close attention to the language from the release (bold mine for emphasis):
J C Penney reported net sales of $2.66 billion compared to $3.02 billion in the fiscal second quarter of 2012. Comparable store sales declined 11.9% in the quarter, and were negatively affected by the Company's failed prior merchandising and promotional strategies, which resulted in unusually high markdowns and clearance levels in the second quarter.
Don't blame us. Blame Ron Johnson.
At least, that's the message it looks like management is shouting. Johnson, the former CEO brought in from Apple in large part because of Ackman, was ousted in April, less than 18 months after taking the reins at the struggling retailer. And while there's no evidence that the plan he was implementing was set for success or failure, it was the board's decision to remove him as CEO--and scrap his marketing and merchandising strategy--that led to the latest quarter's poor results.
Still losing business where it matters most
Web sales are now central to the success of retailers like Penney, which makes the continuing decline of its web business--a 2% drop last quarter--concerning, especially as traditional retailer competitors like Macy's (NYSE:M) grow stronger in their ability to fulfill web orders.
As of the end of 2012, customers could pick up a web order at 292 Macy's stores, or simply use free shipping. By the end of 2013, customers will have more than 500 stores to choose from to pick up an item. The company is also expanding its Goodyear, AZ distribution facility by 300,000 sq feet in order to more quickly fulfill web orders. While Macy's doesn't break out web orders in its financial filings, it's not a stretch to conclude that these investments are being made to foster and support growth in web sales.
While Macy's just-reported quarter shows that sales were flat, earnings per share continue to increase as the company aggressively buys back shares. Shares outstanding have been reduced by almost 9% since 2011. With another $2.2 billion authorized to buy back shares, this would return another 12% in equity to investors and save another $40 million in annual dividend payments.
Penney, on the other hand, is in essentially the same mess it was a few weeks ago, with no clear direction forward. Add in the poison pill, and all management and the board has done is indicate it's willingness to defend itself, and not necessarily the best interests of the company. Because frankly, the first thing an investor with enough resources to take a large position would do is make changes on the board. And maybe a wholesale refresh is what's needed.
Bricks and mortar are nice, but are still losing relevance
Amazon (NASDAQ:AMZN) is continuing to show how true this is. Penney, Macy's, Target, and Wal-Mart all showed flat-to-poor results in the latest quarter, while sales at Amazon were up 22%. And while there were rumors about a year ago that the company was planning to test retail stores, this hasn't happened. What has happened, though, is the company is expanding Amazon Locker, and testing same-day shipping in limited markets.
Simply put, the strong growth of its traditional web business is funding the company's attempts to come full-circle to the last vestige of benefits for many bricks and mortar stores: buy it today, get it today. Don't get me wrong; consumers aren't going to just stop going to stores tomorrow. But the pull of convenience is very powerful, as Amazon's continual growth testifies.
So what's this have to do with Penney?
Management has yet to demonstrate that:
- It has a plan
- Can execute that plan, and stick to it
- Said plan will yield positive results
Amazon and Macy's, on the other hand, are executing on all three.
Until Penney shows us that it can execute a plan to regain lost customers, expand its Internet business, and return to profitability, investors are better off looking elsewhere. Amazon's valuation may be sky-high, but so is its growth rate, while traditional retail competitors are losing traction. Because of its high valuation and share price volatility, investors are best served by starting small and building a position over time. Chances are, mister market will help you get better prices if you're patient. Just don't expect Amazon to ever be a bargain stock.
Macy's may not be anything like the growth story that Amazon is, but management is doing a worthy job of managing expenses, as well as returning capital to shareholders through dividends and share buybacks. The number one thing it offer investments today, versus Penney? A track record of success, and a predictable path to more profits. And that's worth a lot more than a "Penney."