Monday, January 27, 2014

J.C. Penney Divides Distressed Funds From Avenue to Centerbridge- Discussion Topic 11/12/2013


  1. Huge Problems might go to bankruptcy:
    1. Profit Margin is all negative this year though their sales are increasing these 2 quarters
    First quarter this year (13.21%), Second quarter (22.01%)
    2.Debt problems
    JC. Penny has 5.8 billion in total debt and total liabilities of 9.3 billion but their Market Cap $3billion. Fortunately , total assets are 11.6 billion. 50% Debt- Asset Ratio.
    3.Serious Solvency problems
    4..Credit Issue. CCC+rating from S&P

    Although J.C penny is making some progress now, there are still some problems that cannot be solved in the short term. In addition, in the long run, I don't see any good from now on. If I am the investor, I will stay away from J.C penny as far as I can because we don't know when J.C penny will bankrupt.

  2. JC Penney: Business consists of selling merchandise and service through department stores and Internet website.

    Sales percentage in 2012:
    -Women’s apparel: 23%
    -Men’s apparel and accessories: 21%
    -Home: 12%
    -Women’s accessories, including Sephora: 13%
    -Children’s apparel: 12%
    -Others: 19%

    Key financial data:
    -Total net sales have declined for past 2 years, 3% in 2011 and 25% in 2012
    -Total sales declined continuously from Q4 FY2011 until bottoming out in Q4 FY2012. No progress from 2013 Q1 to Q4
    -Web sales is estimated to increased 23% from Q3 to Q4, while that declined by 26% compared to Q3 2010. Other competitors have passed
    -In store sales is weak both in year-over-year trends and sequential trends
    -Past 5-year total stock return is much lower than its competitors
    -Operating income is negative since 2011, 832M in 2010, -2M in 2011, -1310M in 2012
    -Free cash flow decreased 77% in 2010, 15% in 2011 and negative $906M in 2012

    What did Ron Johnson do in 2011?
    -Cotton price nearly doubled in 2011 and had a huge effect on the company cost. He didn’t pay attention to that change
    -Fire the advertising company and public relation company, which both corporated with JCP for more than 5 years
    -10% of employees were laid-off
    -Fired all senior managers and thousands of middle level managers
    -Cancelled the commission for salesman

    -Liquidity risk. Free cash flow is negative from Q1 to Q4. Their need for more debt worse the situation.
    -Default risk. Downgrading of credit rating shows higher default risk and higher financial cost.

  3. J.C. Penny Company, Inc


    Revenue Structure
    - By type of commodities
    • Women’s apparel 23%
    • Men’s apparel and accessories 21%
    • Home 12% (-3%)
    • Women’s accessories, including Sephora 13%
    • Children’s apparel 12%
    • Family footwear 7%
    • Fine jewelry 7% (3%)
    • Services and other 5%

    - By brand ownership
    • Own private brands. Generating 50% of total revenue(4 categories, conservative, traditional, modern, contemporary)
    • National brands. Generating 50% total revenue (Levi’s, Nike and Carter’s)
    • Focusing on nurturing and enhancing of its private-brand products

    Important drivers for JCP’s future growth
    • Online sales at; contemporary shopping trend/ -2.2%
    • The private-brand products sales; Pricing power

    Favorable conditions
    • Sequential improvement in selling. Sales increase in past October since 2011(a positive signal)
    • Online sales was up 37.6 % in October; sales in Home categories constituted 50%/ Double digit growth in Women and Men’s apparels online
    • The shopping season is coming

    Unfavorable Conditions
    • LT Debt to Total Capital Ratio is 60.4%; high financial cost; interest is 12% of gross profit
    • Liquidity problem. Free cash flow was a negative $2.1 billion
    • Gross margin 29.6%, compared to 33.2% last year/increase inventory level/a higher level of clearance sales
    • Online sales were down 2.2% from the same period last year

  4. JC Penney generates revenue through both retail operation and online sales. Retail proceeding contributes to roughly 92% of the sales, and online sales make up the rest 8%. And that composition has been quite consistent in the past 4 or 5 years. I did not find information regarding expenses or operating profits based on segments, but I would imagine that over 90% of the costs go towards retail operations, due to the cost-effective nature of online business.
    What matters at this point is whether the company could turn around the business by growing sales, and improving its free cash flow. Now, since Chief Executive Mike Ullman took back the position in April this year, the management had brought back discounting and some merchandise to attract core customers. The Bloomberg article suggested that the move translated into the first monthly sales gain in almost two years. The assumption is, if sales would rise fast enough or be profitable enough, the company will not need to raise more cash next year.
    By issuing debt and taking term-loan, JC Penny has been raising the total debt to total equity ratio from roughly 65% to 250%, which is huge given the industry average of 89%. And at the same time of bringing cash, the strategic move really leverages the risk of defaulting on its debt. I feel that most income fund asset managers on the buy-side probably won’t include JC Penny stock or debt in their portfolios.
    On the economic side, JC Penny has a relatively low pricing power, as it is a chain of mid-range department stores and does not have any upscale chains such as Nordstrom or Macy’s (Bloomingdale’s). The fact has profound implications on JC Penney’s pricing power, as the article mentioned that the previous Chief Executive Ron Johnson’s attempt to end discounts effectively turned customers off and increased losses.
    It looks like at this point, JC Penny is not looking into expanding its retails locations as the company apparently does not have much cash for that purpose. As a matter of fact, the number of locations have been declining slightly in the past 4 quarters. There is no apparent issue with the company’s supply chain as JC Penny sources from a variety of brands and multiple channels, just like any other department stores. And plus the company reported improved inventory levels last Thursday.
    In one of the Wall Street Journal article, there was concern over if the gains in sales are coming at the expense of profit margins as the company offers deep discount to clear unsold goods. I checked the numbers, and it turns out that the profit margins have gradually decreased from around 40% in 2010 to under 30% in the latest quarter.
    Overall, whether JC Penny could turn around its business largely depends on the sales growth, and we should have a better picture when the company releases its third quarter earnings next Wednesday.

  5. -Business Overview:
    JC Penny is a major national retailer, operating 1,104 department stores in 49 states, as well as through their Internet website. They sell family apparel and footwear, accessories, fine and fashion jewelry, beauty products through Sephora.
    For the second half of fiscal 2013, they plans to add 30 new Sephora stores, taking the total store count to 446.

    -Core Business:
    Women’s apparel 23%
    Men’s apparel and accessories 21%
    Women’s accessories, including Sephora 13%
    Home 12%

    -Financial Data:(2012)
    Profit Margin -13.29% (Sinking sales)
    Return on Asset -9.99%/ Return on Equity -53.71% (Negative return over 2 years)
    Dilluted EPS -7.32
    Current Ratio 1.42 (liquidation issue)
    Total Debt/Total Equity 250.9 ( increasing default risk)

    -Credit Rating:
    S&P: Ccc+ / Moody’s: Caa1 (Downgrade in 2013)

    -Investment Summary -JC Penny’s Fix Income

    1.Collaborated bond /Long term asset backup:The $2.25 billion covenant-lite loan was issued at 99.5 in May.
    2.Long-term bonds was funded by some major financial institute, such as CIT Group
    3.Deep discount
    4.Catalysts that Could Drive Growth
    5.Sephora Inspiring Confidence

    1. Insufficient Liquidation: internal and external sources of liquidity may not be sufficient for our cash requirements.
    2. Changes in credit ratings may limit company access to capital markets and adversely affect liquidity.
    3. Legal and regulatory proceedings could have an adverse impact on the results of operations such as .Levi & Korsinsky financial info disclosure lawsuit.
    4. The company may strategically file for bankruptcy protection to conserve cash.
    5. Estimated bankruptcy risk 45.01%

    It continues to execute a turnaround in 2014 and 2015. We believe in the viability and sustainability of JCP, which with support from a significant investor
    Hold: Long-term bond (Hedge with JP Penny CDS)
    Sell/Underweighted: Short-term bond & Stock

  6. Company Overview:
    - Eight business segments: Women’s appeal (23%), Men’s apparel and accessories 21%, Women’s accessories, including Sephora 13%, Home 12%, Children’s apparel 12%, Family footwear 7%, Services and other 5%.
    - Private brands, including exclusive brands found only at jc penney, comprised approximately 53% of total merchandise sales for 2012, compared to 55% in 2011.
    - In2012, comparable store sales decreased 25.2%. Internet sales, which are included in comparable store sales, decreased 33.0%, to $1,023 million. Total net sales decreased 24.8% to $12,985 million compared with $17,260 million in 2011.

    Financial Overview:
    - Profit Margin: -13.29 by Q2
    - Operating loss : $385 million compared with an adjusted loss of $74 million in the year-ago quarter
    - ROE -47.09; ROA -13.09: Both negative and worse than previous quarter and last year, continuing financial losses
    - D/E 2.12 rose from 1.03: More risky
    - Credit Ratings: Fitch Ratings on Oct. 2 downgraded J.C. Penney and its senior notes to CCC, from B-

    - Seasonal characteristic may drive sales in the next quarter with promotion strategies
    - In-store Sephora departments may continue contributing to sales. For the second half of fiscal 2013, the company plans to add 30 new Sephora stores, taking the total store count to 446

    - Sinking Sells and widened losses
    - Losing price power because of competition
    - Credit Rating downgrade increasing financing costs on debts
    - High D/E ratio, high risk of defaulting
    - Negative free cash flow leads to liquidity problem

    JC Penny’s sales are sinking and the company is facing lots of problems. As an investor I would recommend to sell its bonds and stocks.

  7. J.C Penny has been in lots of trouble in the first three quarters of FY13 with negative free cash flowen, negative net income, Negative Earnings growth etc. But the measures taken by the company need to be appreciated at a time when they were adviced to file for bankruptcy.