J.C. Penney Posts Slower Sales Slide as Bass Bets on Revi
J.C. Penney Co. (JCP)’s sales decline slowed in the second quarter, a sign Chief Executive Officer Mike Ullman is making progress in a turnaround effort as hedge-fund investors including J. Kyle Bass make bets the retailer will recover.
Revenue in the quarter ended Aug. 3 fell 12 percent to $2.66 billion, the Plano, Texas-based department-store chain said today in a statement. That’s less than the 23 percent drop in the same period last year.
Ullman may be starting to undo the damage from former CEO Ron Johnson’s failed overhaul by reviving sales events and bringing back private-label merchandise that appeals to the chain’s traditional customers. Bass, who focuses on corporate turnarounds, has accumulated a long position in J.C. Penney over the past two weeks by buying the company’s secured loans, according to a person familiar with the matter, who asked not to be named because the information is private.
“It’s not the disaster some thought it would be,” Liz Dunn, an analyst at Macquarie Group in New York, said in an interview on Bloomberg Television. She rates the shares neutral, the equivalent of a hold.
To keep the turnaround going, Ullman will have to preserve cash. Earlier this month, analysts including JPMorgan Chase & Co.’s Matthew Boss said the retailer was using so much cash it may need to seek more outside funds by the end of the year. J.C. Penney said today it expected to end the year with more than $1.5 billion in liquidity and that the forecast doesn’t assume outside financing.
Within three weeks of returning, Ullman drew down $850 million of the company’s revolving credit line and negotiated a $2.25 billion loan. It pays interest at 6 percent, according to data compiled by Bloomberg. The debt was quoted at 95.5 cents on the dollar today, down from a high of 101.9 cents on July 23, according to data compiled by Bloomberg.
Given the company’s use of cash, “things really need to turn quickly in the third quarter,” Dunn said. “I didn’t think they had a shot to do it in this second quarter, but the third quarter is make or break.”
The revenue declines improved each month throughout the quarter, a trend expected to continue through the rest of the year, and was encouraging during the early part of the back-to-school season, J.C. Penney said.
Yet Johnson’s more upscale home department is hurting same-store sales, which slid 12 percent at locations open at least 12 months. The former CEO added designer goods such as $60 toasters from architect Michael Graves and big-ticket goods including a $1,695 chair from Happy Chic by Jonathan Adler.
“Our underperformance in this area has been a major obstacle in the turnaround effort,” Ullman said in an analysts’ conference call today. “It was apparent quickly that the merchandise wasn’t resonating with our core customer, and performance is weaker than we hoped.”
Some underperforming home-goods boutiques opened under Johnson will be closed, the company said, without specifying which ones.
J.C. Penney rose 6 percent to $14.01 at the close in New York. The shares have fallen 29 percent this year, compared with a 16 percent gain for the Standard & Poor’s 500 Index.
Bass, 43, founder of Hayman Capital Management LP in Dallas, is betting that J.C. Penney can stabilize sales and has enough cash and credit to carry it until the 2014 holiday season, said the person familiar with the matter. In the hedge-fund manager’s view, the company’s apparel business is rebounding and it is sitting on valuable real estate.
Bass also has sold a type of insurance called credit-default swaps to other investors that pays out if the company defaults on its debts, an event he considers unlikely, said the person.
Contracts protecting against the company’s default for five years decreased 0.4 percentage point to 19.4 percent upfront, according to data provider CMA, which is owned by McGraw Hill Financial Inc. and compiles prices quoted by dealers in the privately negotiated market. That’s in addition to 5 percent a year, meaning it would cost $1.94 million initially and $500,000 annually to protect $10 million of J.C. Penney’s debt.
The contracts, which decline as investor confidence improves, have eased from a record 23.5 percent on Aug. 9. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. Investors use the contracts to hedge against losses on corporate debt or to speculate on creditworthiness.
J.C. Penney’s net loss in the quarter expanded to $586 million, or $2.66 a share, from a deficit of $147 million, or 67 cents, a year earlier, the company said. Discounting reduced gross margin, or the percentage of sales left after the cost of goods sold, to 29.6 percent from 33.2 percent.
J.C. Penney is working on its turnaround amid what has proved to be a difficult quarter for many retailers. Macy’s Inc. (M) posted its first sales drop since 2010 and its profit trailed analysts’ estimates for the first time since 2007. Wal-Mart Stores Inc. last week said earnings for the rest of the year would be less than it previously expected as consumers were reluctant to make discretionary purchases.
J.C. Penney’s executives also have had a tumultuous couple of weeks. The company on Aug. 1 was forced to deny a report that CIT Group Inc. had stopped funding some of its vendors.
Then Bill Ackman, a director and the chain’s largest investor, publicly sparred with his fellow board members over his push to replace Ullman sooner than they wanted. The argument ended with Ackman resigning from the board and reaching an agreement in which he can start selling his stake with company approval in November.
Under Ullman, J.C. Penney has ramped up discounts, run ads apologizing to the chain’s shoppers and tried to improve customer service by adding cash registers.
Johnson worked to attract younger and more affluent consumers with higher priced goods while jettisoning several brands, cutting back on the range of sizes offered in stores and revamping the home section with designer goods and furniture.
The strategies, along with eliminating most discounting, failed to bring enough new shoppers to make up for the loss of J.C. Penney’s core of middle-aged female customers who didn’t like the changes.
Add in the disruptions from the construction needed to remodel several parts of the store, and sales collapsed 25 percent last year, leading to a $985 million net loss.
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