Thursday, August 23, 2018

J.C. Penney and Sears: The Hollow Men- An American Tragedy

The story of J.C. Penney and Sears today reminds me of T.S. Eliot’s 1925 iconic poem, The Hollow Men.The last four lines of that poem read:

This is the way the world ends
This is the way the world ends
This is the way the world ends
Not with a bang but a whimper.

This story is nothing less than a Modern Tragedy. What happened? Perhaps the two most iconic retailers in the US, maybe the world, are slowly fading to nothing. Without fanfare, without noise. Both are almost gone, and more than probably will be soon. Yet, the retail scene in the US is the strongest and most dynamic in the world. 

Let’s take a real quick history tour and then look at the numbers. Numbers are the Single Version of The Truth.

First, J.C. Penney:
·     First store 1902
·     Renamed J.C. Penney 1913
·     1917-175 stores, 500 stores 1924, 1000 stores 1928.
·     1928 business $190Million (=$2.71 Billion 2018)
·     First Catalog 1963
·     1971 business $5Billion (=$30.2 Billion 2018)
·     First Internet Store 2001
·     2012 it was revealed the 30% of the company’s bandwidth was used for viewing YouTube videos- 1600 Heads rolled.
Next, Sears:
·     Started in 1892
·     Catalog 1906
·     1907 business $50 million ($1.3 billion 2018)
·     2004 bought by Kmart, became part of Sears Holdings).

Let’s look at key financial data:
J.C. Penney:
·     8/22/2008 Stock price $38.32 (9/12/2008 stock price $41.43)
·     8/22/2018 stock price $1.81 (Citi puts the fair value at $.50)
·     Market Cap=$547.5 Million (that is Million, not Billion)
·     Revenue $12.34 Billion (-$1.19%)
·     Cash $182 Million
·     Debt $4.22 Billion
·     8/22/2008 Stock Price $62.80 (5/4/2010 stock price $91.04)
·     8/22/2018 stock price $1.19 (no, I didn’t miss any digits)
·     Market Cap $133.2 Million
·     Revenue $15.29B (-27.34%)
·     Cash $466 Million
·     Debt $5.53 Billion

Wow. So where did all that business go? Here are a few places:

·     8/22/2008 Stock price $59.21
·     8/22/2018 Stock price $95.72
·     Market Cap $283.52 Billion
·     Revenue $510.16 Billion
·     Cash $15.84 Billion
·     Debt $53.80 Billion
·     8/22/2008 Stock price $52.66
·     8/22/2018 Stock price $85.88
·     Market Cap $44.39 Billion
·     Revenue $72.64 Billion
·     Cash $1.06 Billion
·     Debt $11.39 Billion (a lot, but still less than revenue OR Market Cap)
·     8/22/2008 Stock price $18.00
·     8/22/2018 Stock price $105.80
·     Market Cap $66.76 Billion
·     Revenue $36.77 Billion
·     Cash $3.12 Billion
·     Debt $2.23 Billion 
(This is a healthy company, folks)
·     8/22/2008 Stock price $20.13
·     8/22/2018 Stock price $37.69 (peak price 7/17/2015 $72.31)
·     Market Cap $11.74 Billion
·     Revenue $25.40 Billion
·     Cash $1.07 Billion
·     Debt $5.54 Billion
(This is a case who could have easily shared the same graveyard as JCP and Sears, but showed some fight. Not out of the eyes of the Grim Retail Reaper yet)
Saved the best for last:
·     8/22/2008 Stock price $85.28
·     8/22/2018 Stock price $1903.70
·     Market Cap $918 Billion
·     Revenue $208.13 Billion
·     Cash $27.76 Billion
·     Debt $45.79 Billion


So, 10 years ago JCP and Sears Stock price was higher than any of the others, except for Amazon. 

Today, any of the above could buy 100% of BOTH Sears and Penney’s stock for cash on hand. Not that you would want to.

What happened?

They lost their fastball. And their relevance. And their identity. But, most important, they managed THEMSELVES into oblivion.  A dear departed friend said, “The fish stinks from the head.” This is the case here. The management not only drained their moat but made it into a parking lot with free passes. Ten years ago, when they were on par or above the retailers that have eclipsed them today, they could have reinvented themselves and embraced the changes in retail-the retail experience, fast fashion, ecommerce, etc. (we all know what they are). IF they did that, their iconic name would have added extra weight to the effort. So who to blame? The buyers, store personnel? Maybe they hired the wrong people, or failed to hire the right people; maybe they lived in a bubble of denial. Any way you look at it, it is MANAGEMENT, who probably collected 7 figure salaries and bonuses as Rome burned. Hey, what if they all gave the money back?

Walk through a JCP or Sears store today and look at their apparel. You honestly cannot imagine in your worst nightmare who is the target customer.

Messiness and crowdedness are horrible, but not necessarily the issue. TJX stores are messy and crowded. But the merchandise is relevant, clearly. Walmart is a nightmare to shop in, but it has its customer convinced, that the price is worth the price of the nightmare.

Target has bridged the gap between mass merchant and fashion destination. Macy’s is trying to keep its level while discounting just about everything.

What these mass merchants like Target have figured out is: IF you can get the prices you need (which you can, see below), it costs the same to buy a tasteful, fashionable garment as an ugly one.

Example: I can buy a blended cotton/polyester mens dress shirt for $4.30 FOB China; with duties and transportation lands around $6.00-$6.25. So if I am not a hog on markup, I can sell a good looking shirt for under $15.

I wish I could have been a fly on the wall at Penney’s or Sears to see just how all that ugly merchandise got past the chief merchants and was put into production. Or maybe the chief merchants just sipped coffee and let the buyers do their thing? Sorry, the retailer in me will never go away. Like my former boss Mike Jeffries (at Federated), I look at something really ugly in the store and say, “ who could have chosen this?” Not hard. The above discount merchants like TJX and Target managed to give the customer fashion value. Clear: there is no price for ugly.

Still today, the only thing of value for both JCP and Sears today is their name. Their merchandise, and management could be scrapped with no loss. Just like Amazon did with Whole Foods (used to be called Whole Paycheck), someone clever could play the Sears or Penneys name into an iconic destination with an American Experience. So much history, and iconic imagery! I am sure of this, but the cost of doing so could be prohibitive.

At this point I only wish the two of them could have gone out according to Dylan Thomas 1947 poem, Do Not Go Gentle Into That Good Night. Here, the iconic verse is:

Do not go gentle into that good night.
Rage, rage against the dying of the light.

Wednesday, August 22, 2018

Target vs. Walmart REVISITED 8-21-2018-Who is your money on now?

December (17) 2017, on my blog  I wrote, “Target vs. Walmart-Who is your money on?”in which I gave the advantage to Target.

Both Walmart and Target have had positive market news recently due to better earnings- to be fair, the whole retail sector is looking attractive to investors. 

So, to revisit the question, who is my money on and who should your money be on today, eight months later?

Let’s take a quick look:

1.    Target:
a.    Today after earnings report= +5.67% -reached a 52 week high of $88.86 
b.    Has steadily climbed to this level from a 52 week low of  $54.21 (If you bought TGT on 12/18 when I wrote the above article, it was $64.08)
c.     EPS of 5.28 and PE 15.28
2.    Walmart:
a.    Today, 1 week after earnings report +.45% $96.51
b.    52 week low $77.50, 52 week high $109.98 (WMT dropped to the mid $80’s last March-April (due to lower than expected online sales increases) and stayed there until this recent (8/17) earnings report. IF you had invested the same day as Target last December, you would just be a little below even now ($97.90 12/18/2017)
c.     EPS of 4.86 and PE of 55.22

Investors are skittish and reactive, but overall they almost always follow the winner.

For all the reasons I gave before, my money is still on Target. Yours?

Suggestion to Walmart: Spend a little less time worrying about Amazon and more worrying about Target- and your nasty store experience.

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