J.C. Penney Company (Click Here To View in Scribd Format)
J.C. Penney Company (Click Here To View in Scribd Format)
J.C. Penney Company (Click Here To View in Scribd Format)
Trading Stats
% of Current 52-Week High 52-Week Low $ $ 39.78 15.05 263% 99%
Thesis Overview
J.C. Penney (JCP) shares have declined 60% in the past year, and 28% in the past five days. This has been fueled by a 25% decline in same-store-sales in 2012, and a once hopeful turnaround story led by Ron Johnson that has not panned out. Because of the stock price performance, critics are labeling Johnsons New JCP shop transformation as a failure, and some are even calling for a bankruptcy filing in the not-so distant future. However, if you analyze the early evidence of the increased sales efficiency new shop models are yielding to the company, you begin to see that Johnsons re-vamped JCP image may actually be working. Turnarounds always take longer than most expect, and media attention on this high-profile story is not helping the patience of many investors. At ~$15/share, the market is essentially implying that Johnsons plan has failed. However, as detailed in our analysis, JCP has time to get it right (in terms of liquidity) and only needs modest gains in productivity have this stock be worth a lot more than it is today.
Company Overview
J. C. Penney has been around since 1924, and operates 1,105 department stores in the U.S. and Puerto Rico. The company sells family apparel and footwear, accessories, fine and fashion jewelry, beauty products, and home furnishings. JCP also sells its products through its web site, www.jcp.com. A breakdown of the companys end customer base is as follows:
Certain apparel brands that JCP sells include: Liz Claiborne, Joe Fresh (new), IZOD, Levis, Arizona Jeans, Nike, DC, and the JCP private label brand (about half of all product sold are private label). Certain home brands that JCP sells include: Martha Stewart, Jonathan Adler, Bodum, Keurig and Terance Conran. Certain accessories brands that JCP sells include: Sephora, Tourneau, Nicole Miller, and Monet.
JCP is attempting to transform itself from a coupon-based lower-income retailer, to more of a middle / upper-middle class retailer with a more transparent pricing model and a re-designed store footprint.
Each JCP store will have wide walkways (called streets), with a central square in the middle of each mall.
Intermixed in and around the shops will be snack, smoothie and coffee bars. Couches will be spread about the shops, and iPads will be available for consumers to use and help browse. Johnson is envisioning a re-vamped look to attract a newer and higher-income customer base. JCP successfully redesigned 8 shops within its stores during 2012. On average, this transformation yielded a 33% increase in sales per square foot productivity.
Customers enjoyed the layout, variety, chicness and new styles that are all present in this new shop format Johnson has devised. Despite this newly devised strategy, same-store-sales for JCP declined 25% in 2012. A major mistake that Johnson made during the year was overhauling the traditional J.C. Penney promotions and coupons. He was convinced that the consumer would react well to having a consistent pricing strategy, where JCP would price its items at an affordable price with limited sales, promotions and coupons; essentially attempting to communicate to its customers that they can get great value at JCP every day. He saw a heavy customer backlash as a result, and capitulated that this pricing strategy was not working on the companys recent 4th quarter conference call. JCP is now returning to its regular coupon-emailing and its regular clearance strategy, however Johnson has communicated that he will not sell every day items at artificially marked-up prices like his predecessors had done. Another reason for JCPs same-store-sales decline was a result of shedding its large inventory load via massive clearance sales. As the company sold off older inventory in order to re-invigorate its clothing & accessories platform, it reduced inventory by 20% in just one year. Heavy sales and clearance programs helped reduce inventory load, which also impacted margins negatively, with total gross margin contracting 470 bps from 36.0% to 31.3% from 2011 to 2012. Johnson and team have done a good job identifying redundant costs to take out of JCPs fixed cost base. On a gross basis, management has identified $900 million of G&A to take out, $800 million of which was removed in 2012 alone. It was reported that after an internal assessment of employee efficiency, management discovered that Netflix consumed 20% of corporate internet bandwidth during work hours, and the average employee made 1,000 clicks on youtube each month. Needless to say, sizeable layoffs occurred in 2011 and 2012, and Johnson has communicated to the Street that right-sizing is a continuous process as JCP continues to tweak its strategy and offerings. JCP also reduced labor hours, simplified stocking and merchandise receiving, optimized supply chain deliveries, and reduced the number of cash registered (with help of supplying almost all floor employees with iPads one data point is as of the last week of February, 25% of all in-store purchased were made on employee iPads). As the company plans to support its transformation plans via cash on hand and internally-generated cash flow, it has increased its liquidity position by tapping credit markets early. Its ABL currently has
Gross SG&A as Margin % of Sales 40% 27% 38% 23% 27% 15% 39% 25% 36% 22%
This inferior sales efficiency is due to the legacy JCP that was mismanaged as discussed in the above section of this JCP research report. On a net basis (only including its traditional department store format, which makes up ~2/3rds of the companys square footage), JCP generates on average $180 per square foot. What management saw during 2012, is that of the 8 shops that were re-designed with the New JCP look within JCP stores, on average revenue per square foot jumped 33% to $239. Although this is only one year of data, JCP has analyzed trends at shops such as Sephora, and over a 5-year period, Sephora saw net same store sales per square foot growing at 5% per annum, even through a recession (2007-2011), after a shop remodel. Thus we have some benchmark to sensitize sales efficiency as JCP continues to revamp its shop-base. Johnson has continued to identify 40%+ to be JCPs long-term gross margin. This is in the ballpark of where JCPs peers are (above), however this will not be achieved until the company sells off all its outdated inventory at a discount (like it aggressively did in 2012), and optimize its pricing strategy (like Johnson is trying to do currently). On the fixed cost front, JCP has identified $900 million in SG&A cuts to make, and has essentially implemented these measures almost entirely. Johnson is keen, however, on spending more on technology investment and new marketing plans. This ranges from iPads for employees, to a fresh TV marketing campaigns at events such as the Oscars. This resets SG&A to a base level of ~$4.3 billion, or 32% of sales. The company should have decent leverage in this new cost base as revenue grows, as evidenced by its competition that has SG&A averaging 22% of sales. Current levels of capex spend should continue over the next 3 years as JCP continues its shop transformation. JCP now has 10 shops transformed to the new JCP format as of FY2013 end, and will do 30 more shops per year over the next 3 years (on average ~100 shops within each JCP department store). Afterwards, capex should drop in the 2-3% of sales range which is in line with historical trends and competition. As we analyze where this puts JCP throughout its store transformation and beyond, we begin to get comfortable that there will not be a major liquidity event, at least in our base case.
FY End Jan 31: Square Footage Breakdow n (sq ft MM) Backroom / Office / Services Small Stores Transform ation Space Total Square Footage Growth in Sq Ftage # of Shops Transformed to JCP # Remaining of Old JCPenney Total # of Shops per Location Growth in Shop # JCP Square Footage Old JC Penney Square Footage Total Sq Ft (in MM) Revenue Productivity New JCP: New JCP Rev per SqFt - First Year Incremental New Square Footage "Mature" New Sqr Footage in Existence "2012 New "2013 New "2014 New "2015 New "2016 New "2012 New "2013 New "2014 New "2015 New "2016 New "2012 New "2013 New "2014 New "2015 New "2016 New SqFt" Lifetime Grow th SqFt" Lifetime Grow th SqFt" Lifetime Grow th SqFt" Lifetime Grow th SqFt" Lifetime Grow th SqFt" Rev SqFt" Rev SqFt" Rev SqFt" Rev SqFt" Rev SqFt" SqFt" SqFt" SqFt" SqFt" # # # # # per per per per per SqFt SqFt SqFt SqFt SqFt
Jan-16 2016E 34 13 64 111 0.0% 100 0 100 0.0% 64.0 0.0 64.0
Jan-17 2017E 34 13 64 111 0.0% 100 0 100 0.0% 64.0 0.0 64.0
Jan-18 2018E 34 13 64 111 0.0% 100 0 100 0.0% 64.0 0.0 64.0
Jan-19 2019E 34 13 64 111 0.0% 100 0 100 0.0% 64.0 0.0 64.0
Jan-20 2020E 34 13 64 111 0.0% 100 0 100 0.0% 64.0 0.0 64.0
10 90 100
2 98 100
10 90 100
$239 1.3 5.1 1.3 5.0% 19.2 6.4 5.0% 5.0% 19.2 25.6 5.0% 5.0% 5.0% 19.2 44.8 5.0% 5.0% 5.0% 5.0% 0.0 64.0 5.0% 5.0% 5.0% 5.0% 5.0% $305 $291 $277 $263 $251 1.3 5.1 19.2 19.2 19.2 $390 $1,487 $5,312 $5,059 $4,818 $17,067 $267 0.0 64.0 2.0% 5.0% 5.0% 5.0% 5.0% $311 $305 $291 $277 $263 1.3 5.1 19.2 19.2 19.2 $398 $1,562 $5,578 $5,312 $5,059 $17,909 $280 0.0 64.0 2.0% 2.0% 5.0% 5.0% 5.0% $317 $311 $305 $291 $277 1.3 5.1 19.2 19.2 19.2 $406 $1,593 $5,857 $5,578 $5,312 $18,746 $293 0.0 64.0 2.0% 2.0% 2.0% 5.0% 5.0% $324 $317 $311 $305 $291 1.3 5.1 19.2 19.2 19.2 $414 $1,625 $5,974 $5,857 $5,578 $19,447 $304
$239
$251 $239
$291 $277 $263 $251 $239 1.3 5.1 19.2 19.2 19.2 $372 $1,417 $5,059 $4,818 $2,294 $13,960 $254
1.3
1.3 5.1
"2012 New SqFt" - Total Revenue Generated "2013 New SqFt" - Total Revenue Generated "2014 New SqFt" - Total Revenue Generated "2015 New SqFt" - Total Revenue Generated "2016 New SqFt" - Total Revenue Generated Total Revenue from New JCP Concept ($ in MM) New JCP Weighted Avg Revenue per Sqr Foot Old JC Penney: Old JC Penney Rev per SqFt % Change in Productivity Old JC Penny Square Footage Remaining Legacy Revenue from Old JC Penney New JCP Weighted Avg Revenue per Sqr Foot Total Wtd Avg Revenue per Net Square Foot Small Store Format Small Store Rev per SqFt % Change in Productivity Revenue per Gross Square Foot
$153
$321 $612
$933 $241
$3,917 $243
$180
$180
$180
62.7 $11,290
$94
FY End Jan 31: Financials New JCP Revenue Old JC Penney Revenue Small Store Format Total Revenue Growth % yoy Gross Profit Gross Margin Margin Expansion Base SG&A New SG&A - Tech Investment, Marketing Total SG&A % of Sales Pension Exp D&A Other Total Other Opex % of Sales EBIT Margin % EBITDA Margin % Less: Cash Interest Cash Taxes Non-Cash Pension Exp Stock Comp Capex Change in W.C. Other FCF Total Cash Pile ABL TLs, Bonds, etc Total Debt Net Debt / EBITDA $1,850 Max Borrowing
Jan-12 2012A
Jan-15 2015E $8,816 $4,878 $1,151 $14,844 10.1% $5,121 34.5% 2.5% $4,326 $111 $4,437 29.9% $200 $594 $0 $794 5.3% ($110) $484 3.3%
Jan-16 2016E $13,960 $1,577 $1,116 $16,654 12.2% $6,162 37.0% 2.5% $4,456 $115 $4,570 27.4% $200 $666 $0 $866 5.2% $725 4.4% $1,391 8.4%
Jan-17 2017E $17,067 $0 $1,083 $18,150 9.0% $7,169 39.5% 2.5% $4,589 $118 $4,707 25.9% $200 $635 $0 $835 4.6% $1,627 9.0% $2,262 12.5%
Jan-18 2018E $17,909 $0 $1,050 $18,959 4.5% $7,679 40.5% 1.0% $4,727 $122 $4,849 25.6% $200 $664 $0 $864 4.6% $1,966 10.4% $2,630 13.9%
Jan-19 2019E $18,746 $0 $1,019 $19,764 4.2% $8,005 40.5% 0.0% $4,869 $125 $4,994 25.3% $200 $593 $0 $793 4.0% $2,218 11.2% $2,810 14.2%
Jan-20 2020E $19,447 $0 $988 $20,436 3.4% $8,276 40.5% 0.0% $5,015 $129 $5,144 25.2% $200 $613 $0 $813 4.0% $2,319 11.3% $2,932 14.3%
$4,066 31.3%
$4,200 $108 $4,308 31.9% $200 $539 $0 $739 5.5% ($733) ($193)
7.5% 35.0%
($268) $0 $120 $50 ($800) ($98) $0 ($1,190) $930 $0 $2,982 $2,982 $1,190 $2,982 $4,172 -16.8x
($338) $0 $120 $51 ($800) ($218) $0 ($700) $890 $1,850 $2,982 $4,832 8.1x
($362) ($127) $120 $52 ($800) ($302) $0 ($28) $862 $1,850 $2,982 $4,832 2.9x
($326) ($455) $120 $53 ($500) ($192) $0 $961 $862 $889 $2,982 $3,871 1.3x
($257) ($598) $120 $54 ($500) ($118) $0 $1,331 $1,305 $0 $2,982 $2,982 0.6x
($224) ($698) $120 $55 ($500) ($188) $0 $1,376 $2,238 $0 $2,982 $2,982 0.3x
($224) ($733) $120 $56 ($500) ($157) $0 $1,495 $2,357 $0 $2,982 $2,982 0.2x
Broadly speaking, JCP falls into a liquidity trap by 2015 if it cannot get gross margin back up to the 35% threshold. This also assumes the New JCP revenue per square foot metric of $239 stays flat throughout the lifespan of the new shops, which results in gross sales per square foot to be $25 below Macys (the lowest of the peer group). If you think downside of JCP is to generate EBITDAR margins of 5-7% (~1,000 bps below peers), then liquidity is definitely a concern. If you believe Johnson can get revenue per square foot and EBITDAR margins, above these depressed levels (which we believe), then the liquidity concern should not be a primary risk. JCP Price Target As we think about what the appropriate share price is for JCP, we run a DCF using the same base case assumptions as discussed above. We use 6x as an exit EBITDA multiple, which is a one turn discount to its department store peers, as the company is clearly lagging its peers in terms of sales efficiency and
Stock Price % of 3/4/13 52-high Dept Stores Macy's Kohl's TJ Maxx Nordstrom
Market Cap
Enterprise Value
Price / Book
Div Yield
Malls Simon Property Group $161.46 General Grow th Properties $19.91 Taubman Centers $76.94
We view a 12% as appropriate, as this turnaround story is clearly an above-average risk strategy, and JCPs current debt levels are high relatively to EBITDA. We are unsure what the companys NOL position is as of year-end, so to be conservative we assume JCP pays cash taxes as soon as it gets back to profitability, which most likely will not be the case as the company is going through a period of numerous years with negative net income.
($ in millio ns)
FY End Jan 31: DCF EBIT Taxes D&A Capex Change in W.C. Free Cash Flow WACC Term Mult 12% 6.0x
Jan-12 2012A
35%
Sum of Discounted Cash Flow s PV of Terminal Value Im plied Enterprise Value Cash Debt Other Equity Value Share Out Im plied JCP Share Price Upside/Downside to Current
These base case assumptions yield a $33 stock price for JCP. As a sanity check (view model to confirm), we see that by FY2020 JCP is generated $184 of gross revenue per square foot, which is at a slight premium to what Macys generates today, yet is still well below what the average of the peer group generates ($271). JCP also creeps up to close to a 16% margin in terms of EBITDAR, which is in line with the rest of the department store space. As we analyze our downside in JCP shares, we assume that the new shop format only grows per annum at 2-3% (as opposed to 5%). The old store format continues to decline on a sale efficiency basis. Also, we assume JCP struggles to get gross margin higher, and only reaches 38% of sales by FY2018, staying at
Jan-10 2010
Jan-11 2011
Apr-12 1Q13
Jul-12 2Q13
Oct-12 3Q13
Jan-13 4Q13
Metrics Sales per Gross Square Foot $149 $153 Components of Sales Increase/(Decrease): SSS, incl Internet (1,085) 406 Sales of new stores 342 77 Sales of closed stores (34) 0 Sales decline thru catalog print media and outlet (280) (153) stores Total Increase/(Decrease) ($930) $203 # of Dept Stores Gross Selling Space (sqr ft in MM) P&L Sum m ary Total Revenue Growth % yoy SSS Growth % yoy Traffic Growth COGS % of Sales Gross Profit Margin % SG&A Pension D&A Real estate & other Restructuring SG&A & Other % of Sales EBIT D&A Adjustments Stock Comp Adj EBITDA Margin % Adj EPS Growth % yoy Avg Dil Shrs Out LTM EBITDA Margin % LTM Adj EPS 1,108 111.7 1,106 111.6
NA 1,105 111.2
NA NA
$3,152 (20.1%) (18.9%) (10.0%) $1,966 62.4% $1,186 37.6% 1,160 58 125 (7) 76 $1,412 44.8% (226) 125 69 0 ($32) (1.0%) $
$3,022 (22.6%) (21.7%) (12.0%) $2,018 66.8% $1,004 33.2% 1,050 58 128 (208) 159 $1,187 39.3% (183) 128 (49) 0 ($104) (3.4%)
$2,927 (26.6%) (26.1%) (12.0%) $1,975 67.5% $952 32.5% 1,087 51 133 (197) 34 $1,108 37.9% (156) 133 (163) 0 ($186) (6.4%)
$10,646 60.6% $6,910 39.4% 5,410 337 495 5 0 $6,247 35.6% 663 495 5 0 $1,163 6.6% $ 1.14 (57.4%) 233 $1,163 6.6% $ 1.14
$10,799 60.8% $6,960 39.2% 5,358 255 511 (28) 32 $6,128 34.5% 832 511 4 0 $1,347 7.6% $ 1.65 45.2% 238 $1,347 7.6% $ 1.65
$11,042 64.0% $6,218 36.0% 5,109 121 518 21 451 $6,220 36.0% (2) 518 472 0 $988 5.7% $ 0.73 (56.0%) 217 $988 5.7% $ 0.73
$8,919 68.7% $4,066 31.3% 4,506 353 543 (324) 298 $5,376 41.4% (1,310) 543 (26) 0 ($793) (6.1%) $ (4.63) NM 219 ($793) (6.1%) $ (4.63)
$2,960 76.2% $924 23.8% 1,209 186 157 88 29 $1,669 43.0% (745) 157 117 0 ($471) (12.1%) (2.03) NM 220
(0.63) $ NM 218
(0.86) $ NM 219
(1.11) $ NM 219
$671 $341 ($61) ($793) 4.1% 2.2% (0.4%) (6.1%) $ (0.19) $ (1.17) $ (2.39) $ (4.63)
Jan-10 2010 1,163 (264) (130) 391 (600) 0 $560 3.2% $1,573 ($587) $183 $0
Jan-11 2011 1,347 (258) (50) (303) (499) 0 $237 1.3% $592 ($485) $189 $0
Jan-12 2012 988 (227) (91) 141 (634) 0 $177 1.0% $820 ($870) $178 $900
Jan-13 2013 (793) NA NA 683 (810) 0 ($920) (7.1%) ($12) ($291) $86 $0
Apr-12 1Q13 (32) (90) (4) (612) (107) 0 ($845) (26.8%) ($577) ($116) $43 $0
Jul-12 2Q13 (104) (23) 55 218 (132) 0 $14 0.5% ($32) $116 $43 $0
Oct-12 3Q13 (186) (92) 134 99 (341) 0 ($386) (13.2%) ($48) ($62) $0 $0
Sum m ary Cash Flow EBITDA Cash Interest Cash Taxes Change in WC Capital Expenditures Other Free Cash Flow as % Sales Cash Flow from Ops Cash Flow from Inv Dividends Paid Share Repurchases Balance Sheet Data Cash & Equivalents Inventories PP&E Merchandise A/P Debt Book Equity Inventory Days on Hand Payable Days on Hand Credit Stats EBITDA / Cash Int Expense Total Debt / EBITDA Net Debt / EBITDA Capex as % of Sales