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Perry Capital Becomes Next Investor to Give Up on JC Penney

By: GuruFocus
Posted: 10/2/2013 12:47:00 PM
Referenced Stocks: JCP

After Bill Ackman dropped J.C. Penney ( JCP ) like a new toy that lost its luster last month, other investors are losing confidence. Investor Richard Perry of Perry Capital, after adding 7 million shares to his J.C. Penney stake on Aug. 30, slashed it by 47.37% yesterday, Oct. 1.

Perry's $15 billion hedge fund acquired 12 million shares of J.C. Penney in the second quarter this year, when the price averaged $17 per share. Yesterday's reduction will leave him with 10 million shares. J.C. Penney is trading at a 10-year low of $8.81 per share on Wednesday, giving the investor an approximate 48% loss on the trade so far.

Perry's JCP investment history:



Though Perry just bought the stake, much has happened between now and then. Namely, the company's largest shareholder and man behind a mid-stage overhaul plan, Bill Ackman, dumped his entire holding of 39 million shares on Aug. 27. His exit came after a kerfuffle with management in which he pushed to expedite the process of finding a new CEO. The company also reported its ninth consecutive quarter of quarterly revenue declines and eighth of net losses, culminating with its 10-year record loss of $586 million in the second quarter.

Adversely impacting results were "failed prior merchandising and promotional strategies, which resulted in unusually high markdowns and clearance levels in the second quarter" and "the lengthy renovation and disappointing re-merchandising of its Home departments," according to the earnings statement.

Indeed, lost faith is an apt description of Perry's assessment of the company, as he said in an Aug. 9 letter "shareholders and creditors have increasingly lost confidence in the company," adding that the company could re-inspire his support if it brought back Allen Questrom, former CEO and chairman, and Ken Hicks, former president and chief merchandising officer.

The company remains under the leadership of interim CEO Mile Ullman, however. A statement released Sept. 26 assured investors that the company is "pleased with its progress thus far in [its] turnaround efforts and the traction its initiatives are starting to achieve." It said performance is achieving greater predictability as purchase conversion improves both in store and on jcp.com due to a return to its former strategies, and it expects positive same-store results coming out of the third quarter and in the fourth quarter.

Apparently, this was not confidence-inspiring enough for Perry.

The next day, J.C. Penney announced a public offering of 84 million shares priced at $9.65 per share to raise money, which took place on Oct. 1.

JCP shares have dropped 55% year to date, including a 29% slide in the last month. Its P/B ratio of 0.85 is near a three-year low, and P/S ratio is 0.16, near a 10-year low. The company has a cash balance of $1.54 billion before the public share offering, with $5.8 billion in long-term liabilities and debt.





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