I just finished watching Bill Ackman’s CNBC interview where he described the current state of JC Penney (JCP). Prior to watching the interview most of the comments about it were surprisingly negative. I felt he did a good job making the bullish case and I appreciated that he actually took the time to explain the situation in depth with real numbers instead of providing the usual CNBC sound bites.
The core of the thesis is that JCP is in the process of rolling out 100 “mini brand stores” inside each current store. They have currently rolled out 10 of the “mini brand stores” and those stores are seeing $270 in sales/sq-foot versus $135 for the rest of the store. The assumption is that as they roll out the other 90, the overall store will now be at ~$250 in sales/sq-foot.
What I wish was better explained is what the breakdown of merchandise currently is between the 10 “mini brand stores” and the rest of the store. If the most desirable JCP merchandise is in those new stores, then it makes perfect sense that they would show a huge increase in sales/sq-foot versus the rest of the stores. But as they roll out another 90 stores, they can’t all be premium in relation to the overall store so what will that do to the sales/sq-foot. Are the 10 current mini stores currently generating a disproportionate percentage of total revenue available to JCP?
The second issue is that if they do scale the sales/sq-foot linearly it becomes a very large number. Ackman mentioned taking it from 7 million sq/feet to 111 million sq/feet. Adding $115 per sq/foot across 104 million of space generates an additional $13 billion in revenue. That’s a huge number and to achieve it they have to add more revenue in the next 3 years than Bed Bath & Beyond currently generates.
Where will that revenue come from? Unlike in Johnson’s previous experience in Apple where the iPod and iPhone were part of new categories, $13 billion in department store style retail sales does not just materialize. It will have to be composed primarily of lost sales from other retailers. Which ones is still to be determined. One last thing to consider as the JCP press continues to be negative is that the list of big names lined up in support for the turnaround continues to grow. Both Lee Ainslie of Maverick Capital and Ricky Sandler of Eminence capital bought a significant number of shares last quarter.