Kyle Bass Long General Motors, Exits J.C. Penney Equity: Interview

In an interview with Bloomberg Television, Hayman Capital's Kyle Bass reveals that he's long General Motors (GM) and has exited his equity stake in J.C. Penney (JCP) but retains his debt position. 

The hedge fund manager also talked about Herbalife (HLF), noting that it generates significant cashflows and no debt.

He originally thought JCP could move higher with a turnaround from new management, but what he got wrong, he said, was the vendors and perception changing so quickly.  He's still long credit but doesn't own equity in the company.

Bass thinks GM can trade 40% higher in the next 18 months.  He says it's a catalytic time to be investing as the Treasury finally exits its stake and the company can initiate shareholder friendly actions.

The Hayman founder also said he didn't see anything interesting in US banks, but he would be betting against European banks, especially as a hedge against other European bets.  Bass mentioned he likes Vodafone (VOD).

Embedded below is Bass' interview with Bloomberg:



For more from this hedgie, head to Kyle Bass' macro debate with John Burbank.

David Tepper Says Market Isn't a Bubble: His Thoughts on Valuation, Tapering, Airlines & More

After the Robin Hood Investors Conference last week, Appaloosa Management founder David Tepper sat down with Bloomberg TV to talk about the markets.


On market valuation: He does not think we're in a bubble now as he compared P/E multiples over the last 5 years to the 5-year period running up to the 2000 bubble.  Stocks now have seen little change in multiples, while stocks back then saw huge multiple expansion.

On airlines:  "Our big play versus the market is the airlines.  We're the biggest holder of many of these airlines." We flagged this big bet for readers of our Hedge Fund Wisdom newsletter over a year ago.  See what else Tepper is betting on by subscribing (a brand new issue was just released last week).

On his 2014 investing approach: "We'll probably stay long.  We recently put on a treasury short, to hedge ourselves against the equity markets.  Little bit scared of tapering... higher rates... though rates won't go that high."

On to be worried about: "I would be worried if I was a long/short guy and not long enough, that's what I'd be worried about.  But I'm not worried, because I am long.  But if I'm a L/S guy who can only go 60% long ... the biggest risk for the market is you'll have multiple expansion, higher growth, 10% earnings growth next year, and you'll have another year of 20-30% (performance)."

On J.C. Penney (JCP): "It was a tiny position... a trade and we're done."

On Twitter (TWTR):  They would have held Twitter longer, but they had a price target in the $40's and so when the stock hit that in the first days of trading, he exited.  "It's a discipline."

On Citigroup (C):  "Citi still has some pretty good upside, we think it can make 7 bucks a share."

On his performance this year:  "I think gross we're in the 40's (%)."

On tapering:  He does think it's time to start tapering. He also said: "There can be a short-term negative reaction.  But if you're tapering, it's because there's stronger underlying US growth.  And if there's growth, there's going to be higher P/E multiples and the market should be higher.  If the market goes down, that's great, it'll be one more opportunity that people will be come and buy."

On what a lower Japanese Yen means: "It means higher P/E multiples in Japanese companies, straight out.  That's the way it works, because they're such exporters. So when you have a weaker yen, you have higher earnings."


Embedded below is the video of Tepper's Bloomberg TV appearance:



For more on the Appaloosa manager, head to Tepper's other recent interview where he said he thinks the market could see an 18-20x multiple.

Marc Lasry Long JC Penney Debt: Invest For Kids Chicago Presentation

Next up in our notes from Invest For Kids Chicago 2013 is Marc Lasry of Avenue Capital.  He pitched J.C. Penney (JCP) as a long at the event.


Marc Lasry's Presentation at Invest For Kids Chicago 2013

•    Reason all the risk in the system is that LIBOR is that 25 bps
•    Supposed to generate a 40x RFR for get 10% per annum. But isn’t there risk there?
•    Why is that risk?


•    Idea #1 is J.C. Penney Debt
o    Why JC Penney? Convince to go and shop
o    Everyone believes JCP will file for bankruptcy
o    Bonds mispriced based on that assumption
o    JCP operates in 49 states (no Hawaii)
o    Slowing retail environment and they get rid of old CEO and bring in Ron Johnson
o    Ron Johnson took a bunch of risk
o    Coupons and promotions here historical
o    Prior to new strategy $17 billion in sales $1.4 billion of EBITDA yet goes to -$500 million of EBITDA
o    Able to raise $2.2 billion of new debt to get to $3 billion of debt and $2.5 billion on unsecured – but that have $2 billion of cash
o    Interest payments are $250 million so hard to file of bankruptcy
o    JCP survives unless the value differential
o    Make ~25% return per year for 2 years in debt so you are making 80x RFR due to the believe that JCP will file bankruptcy
o    Same stores sales are flat to up
o    So you are creating the company
o    Majority is telling you “you are wrong”
o    “Nobody likes noise and don’t want to deal with it and that creates opportunity”

While Lasry's talking about debt, numerous other prominent hedge funds have been in and out of JCP equity and you can scroll through that link to follow the saga.


•    Idea #2: Connacher Oil & Gas Bonds at 70
 o    Worth par over a year to a year and a year and a half
o    Pure oil sands company in western Alberta
o    Crude is at $90 a barrel and the price of crude was $45 in 2012
o    Keystone pipeline was delayed and so shipping crude was expensive by rail and they have reduced arbitrage from $16 per barrel in operating margin to $32 (should still rise)
•    Buying investment at 43% discount to NAV because the market doesn’t understand what Connacher is doing and create something at a big discount to a proven value (as opposed to under comps) 


Check out the rest of the hedge fund presentations from Invest For Kids Chicago here.

Bill Ackman & Pershing Square's Q3 Letter: Converts 40% of Herbalife Short to Put Options

Bill Ackman recently sent out his letter to investors from hedge fund Pershing Square Capital.  In it, he reveals that he's switched out almost half of his Herbalife (HLF) short position from equity to put options.  He made this move largely for risk management purposes.

He also talks about his new activist position in Air Products & Chemicals (APD) where they've already made progress by replacing the CEO.

Bill Ackman's Q3 letter is embedded below, courtesy of The New York Post:

 


If you missed it: Ackman also dumped his J.C. Penney stake as well.

Perry Capital Dumps Almost Half of J.C. Penney Stake

Richard Perry's hedge fund firm Perry Capital yesterday filed an amended 13D with the SEC regarding shares of J.C. Penney (JCP).  Per the filing, Perry has disclosed a 3.28% ownership stake with 10 million shares of JCP.

This means that Perry has dumped almost half of the JCP position they recently took.  Their latest filing shows they sold shares on September 27th at prices ranging from $9.02 to $9.5887.  This is around the time J.C. Penney announced that they would be issuing a ton of stock. 

When Perry initially took the stake, we pointed out that they were already down on the position as they started buying around $17.77 and added again around $14.86.  Then, a month later, they bought some of the shares that Bill Ackman was liquidating at around $12.90.  Then, as illustrated above, Perry capitulated and sold almost half of their stake in the $9's.

Things have only gotten worse as JCP now trades around $8.76.  While Perry has had a quick about-face on their JCP position size, it remains to be seen if they'll retain the rest of their shares. 

J.C. Penney has quickly become somewhat of a hedge fund graveyard.  Other hedge funds have been involved as well, such as Glenview Capital and Soros Fund.   And last month, we also highlighted that Kyle Bass' Hayman Capital had also started a J.C. Penney position.  We'll have to see if any of these other managers have a change of heart as well.

Glenview Capital Becomes Large J.C. Penney Shareholder

We know you'd love to stop hearing about J.C. Penney (JCP), but when this many major hedge funds are trading shares, it's worth highlighting over and over again.  This latest activity:  Larry Robbins' Glenview Capital has boosted its holdings in the retailer.

Per a 13G filed with the SEC, Glenview has disclosed a 9.10% ownership stake in JCP with 20,060,830 shares.  This marks almost a 138% increase in their position size since the end of the second quarter.  The filing was required due to activity on August 22nd.

To see the rest of Glenview's US equity portfolio, we recently released a brand new issue of our premium newsletter.


Other Hedge Funds Involved in JCP

As we've flagged earlier: Bill Ackman has sold entirely out of JCP.  Richard Perry's hedge fund bought some of those JCP shares.  And yesterday we saw that Kyle Bass has purchased JCP.  And now we see that Glenview Capital has added to their position.  Not to mention, other big names like Soros Fund also own shares.

We'll continue to monitor the SEC filings for further activity to see which funds are taking advantage of a large seller's exit or are wagering on a company turnaround, or at the very least, stability.

Kyle Bass Discloses J.C. Penney Stake; Perry Buys Some of Ackman's Shares

If you aren't tired of hearing about J.C. Penney yet (JCP), here's even more hedge fund activity in the name:

Kyle Bass Starts J.C. Penney Stake

First, a 13G filed with the SEC has revealed that Kyle Bass' Hayman Capital owns a 5.2% stake in J.C. Penney (JCP) with over 11.4 million shares. This is a brand new position for the hedge fund as they did not own any JCP at the end of the second quarter.


Perry Buys Ackman JCP Shares 

Recently, we highlighted how Richard Perry's hedge fund Perry Capital had taken a position in JCP.  Well, they've since added to that position.  We also flagged how Bill Ackman was exiting his JCP stake and as it turns out, Perry was one of the buyers, purchasing 3 million shares at $12.90.  They now own around 8.62% of the company

This whole JCP saga will make for a very interesting investing/business school case study one day.

Bill Ackman Dumps J.C. Penney Stake

If you missed it, Bill Ackman's hedge fund Pershing Square Capital Management has dumped its stake in retailer J.C. Penney (JCP) according to an amended 13D filed with the SEC. 

Ackman offloaded the shares to Citigroup, who in turn will sell them to other investors.  Dow Jones reported that Citi offered the shares between $12.50 and $12.90.

Pershing had previously owned 18% of the company and it looks like they'll lose ~$400 million on the trade.  To walk through Ackman's thinking on his JCP decision, you can check out Pershing Square's Q2 letter which gave hints that he was leaning toward selling.

Some investors have called Ackman's sale a 'capitulation' of sorts and a potential contrarian signal for the stock to head higher, but then you also have to consider that it would still be a bet on the company's fundamentals.

Ackman was also recently interviewed by Charlie Rose.

Bill Ackman's Interview With Charlie Rose

Bill Ackman of hedge fund Pershing Square Capital Management recently appeared on Charlie Rose for an interview. 

While Ackman has been in the media a lot regarding his short position in Herbalife (HLF) and long position in J.C. Penney (JCP), this is the first appearance Ackman himself has made in quite some time.  As such, we wanted to highlight his latest thoughts on the various situations he's involved in.

Embedded below is the video of Ackman's interview:



If you missed it earlier, you can also check out Ackman's Q2 letter.

Bill Ackman's Q2 Letter: Updates on Pershing's Positions

The New York Post has shared Bill Ackman's Q2 letter and it's quite in-depth and worth highlighting.  The Pershing Square manager provides updates on many of his positions, including his new position in Air Products & Chemicals (APD), his controversial Herbalife (HLF) short, as well as their troubled stake in J.C. Penney (JCP) and more.

Embedded below is Ackman's Q2 letter:




For more from this manager, you can check out Ackman's presentation on Procter & Gamble.

Perry Capital Files 13D on J.C. Penney & Sends Letter to the Board

Richard Perry's hedge fund firm Perry Capital has just filed a 13D with the SEC regarding shares of J.C. Penney (JCP).  Per the filing, Perry now owns 7.26% of JCP with 16,000,000 shares.  This is a brand new position for the hedge fund.

The filing was required due to activity on August 9th.  However, Perry started buying JCP shares as early as June 12th at $17.77 and throughout July and into August.  Their most recent disclosed purchases come on August 1st at around $14.86.

Perry owned 12 million JCP shares as of June 30th, and then has purchased an additional 4 million shares since then.  With the slide in JCP shares down to current levels of $12.81, Perry is already down on this position.


Perry's Letter to JCP's Board

Below is the letter Richard Perry sent to the Board of Directors today:

"August 9, 2013

Dear Mr. Engibous and the J. C. Penney Company Board of Directors,

Perry Capital currently owns shares representing beneficial ownership of 7.26% of J. C. Penney Company. Shareholders and creditors have increasingly lost confidence in the company, as evidenced by the recent significant decline in the company’s stock and bond prices.  This market reaction is particularly alarming given the company’s meaningful improvement in liquidity following its $2.25 billion term loan financing. We strongly urge the Board to take immediate and proactive steps to improve the financial and operational management of the company.

Assuming recent press reports are accurate, Perry Capital would be very supportive of a return to the company by Allen Questrom and Ken Hicks. While we appreciate Mike Ullman’s willingness to assume the interim CEO role at a critical juncture, we believe it is imperative that the Board promptly establish a Board and management structure that provides the company the greatest chance for success. We believe that immediately appointing Allen Questrom Chairman of the Board and Ken Hicks CEO is imperative at this juncture, and we anticipate that the company’s various constituents would be highly supportive of such a change. In the words of Citigroup retail analyst Deborah Weinswig in a publicly available research note:  “Questrom + Hicks = Dream Team” (Dear Board of Directors, Time is of the Essence! August 9, 2013).

Given the urgent nature of the situation, I am releasing this letter publicly so that other shareholders who feel the same way can express their opinions directly to the Board. 

Sincerely, Richard Perry"

What We're Reading ~ Analytical Links 5/22/13

A lesson from Warren Buffett: doubt yourself [WSJ]

Jelisavcic: This is an optimal time to invest in distressed debt [FINalternatives]

Are corporate profit margins abnormally elevated or sustainable? [Greenbackd]

Don't just do something, sit there [The Economist]

Steve Romick: trade into the gold you can eat, farmland [Forbes]

Why investors can't imagine a collapse of the bond market [WSJ]

Telecom's big players hold back the future [NYTimes]

Investor sentiment: fear and greed index [CNNMoney]

Hedge fund leverage approaches all-time high [ai-CIO]

National Bank (NBHC) on the prowl [Barrons]

Why Alibaba could be China's next big IPO [Reuters]

Anatomy of the 10-K [Wall Street Oasis]

How the SEC's marketing rules shortchange investors [ii alpha]

Is the asset management business set for consolidation? [Citywire]

Warren Buffett is bullish on women [CNN Money]

If MBAs are useless, we're all in big trouble [Quartz]

Ron Johnson's 5 key mistakes at J.C. Penney [Fast Company]

Soros Fund Starts J.C. Penney Stake

George Soros' family office Soros Fund Management filed a 13G with the SEC late yesterday afternoon regarding shares of J.C. Penney (JCP).  Per the filing, Soros Fund has revealed a 7.9% stake in JCP with almost 17.4 million shares.

This is a brand new position for the family office as they did not disclose a stake at the end of 2012 in their most recent 13F filing.  The 13G just filed was required due to portfolio activity on April 15th.

CEO Ron Johnson was recently fired from JCP and shares have risen since then.  He was originally recommended by Pershing Square's Bill Ackman and the company will now turn to new management.

We've highlighted how Bill Ackman has a large stake in J.C. Penney and have posted up Ackman's presentation on JCP before.  There's also one coincidence here: both Pershing Square and Soros Fund share the same New York office building address.  Perhaps Ackman recently gave an elevator pitch?

Shares of JCP have fallen from $35 down to around $16 over the past year as they have struggled amidst a turnaround plan involving the company's stores.

Per Google Finance, J.C. Penney is "a retailer, operating 1,102 department stores in 49 states and Puerto Rico as of January 28, 2012. Its business consists of selling merchandise and services to consumers through its department stores and through its Internet Website at jcp.com. It sells family apparel and footwear, accessories, fine and fashion jewelry, beauty products through Sephora inside jcpenney and home furnishings."

What We're Reading ~ Hedge Fund Links 4/12/13

Notes from Jeff Gundlach's DoubleLine lunch [Reformed Broker]

Diworseification: avoiding over-diversification with best idea funds [SumZero]

Lee Cooperman: stocks are the place to be [HFIntelligence]

Alternative investments are no longer all that alternative [Abnormal Returns]

Vulcan Value Partners offers top investing ideas [Barrons]

Third Point plans Greece fund [Bloomberg]

Some March hedge fund performance numbers [HFIntelligence]

Are hedge fund-backed reinsurers here to stay? [Reuters]

Ackman says mistakes were made in JC Penney (JCP) turnaround [Reuters]

Paulson said to start fund to reduce clients' tax bills [Bloomberg]

Quant funds run one-third of hedge fund assets [HedgeWorld]

Agrium (AGU) sweeps proxy vote, JANA Partners cries foul [Reuters]

Canadian Pacific (CP): Off the tracks after Ackman [Seeking Alpha]

Institutional herding in the corporate bond market [SSRN]

An old profile of Carl Icahn [LATimes]

What We're Reading ~ Analytical Links 3/6/13

Book that changes the way you do business: The Innovator's Dilemma [Clayton Christensen]

The short case on Boulder Brands (BDBD) [Prescience Point]

Why are most people terrible investors? [Phil Pearlman]

12 cognitive biases that endanger investors [Minyanville]

Interview with Paul Lountzis on investing & scuttlebutt research [Simoleon Sense]

On doing less [Capital Observer]

Dow hits record high with household income at decade low [Atlantic]

Verizon (VZ) said to seek to resolve Vodafone (VOD) relationship [Bloomberg]

Cash levels in brokerage accounts approach lowest levels ever [Kimble]

Study reveals most at-risk retailers for Amazon showrooming [Placed]

Shorts battle longs over Fairpoint Communications (FRP) [Forbes]

Want to short the student loan bubble? Now you can [Zerohedge]

Getting schooled by Career Education (CECO) [Barel Karsan]

Vornado selling chunk of J.C. Penney (JCP) stock [WSJ]

America Movil (AMX): time to buy in bulk? [FT]

Imagining cable TV if bundles unravel [WSJ] and News Corp creates sports network [NYT]

Google (GOOG) is building a same-day Amazon Prime competitor [Techcrunch]

Cree (CREE) introduces LED lightbulb [Yahoo Finance]

Why getting an MBA isn't worth it [WSJ]

What We're Reading ~ Hedge Fund Links 3/1/13

Lessons from Hedge Fund Market Wizards: Steve Clark [Finance Trends]

Einhorn's Greenlight Re conference call transcript [Santangel's Review]

Looking for alpha? Try women hedge fund managers [Yield of Dreams]

Harbor Investment Conference: picks from McGuire, Ackman & more [HFIntelligence]

Tale of Loeb & Ackman's bike ride [Vanity Fair]

Outlook from Oaktree's Howard Marks [Outlook India]

Loeb sells part of long position in Herbalife (HLF) [CNBC]

Is RenTec falling off the mark? [II]

Tudor said to plan first equity funds since Pallotta left [Bloomberg]

Goldman Sachs: hedgies most bullish on stocks since 2007 [WSJ]

Gross, Dalio, Gundlach... Minerd? [aiCIO]

Deutsche Bank says new hedge fund deposits to triple [Bloomberg]

Hedge funds seen behind likely VIX short squeeze [Hedgeworld]

Ex-Soros CIO courting capital for new fund [Reuters]

ValueAct supports sale of Gardner Denver (GDI) [Reuters]

J.C. Penney's (JCP) poor showing is another retail miss for Ackman [NYTimes]

Ken Heebner bets 21% of his fund against Treasuries [Bloomberg]

Hedge funds grow nervous after credit rally [Reuters]

Pinterest valued at $2.5 billion following investment from Valiant Capital [Bloomberg]

What We're Reading ~ Analytical Links 1/17/13

By popular demand from readers, we're expanding the "what we're reading" linkfests to twice a week, starting now.  To differentiate the lists, we'll be posting:

- 1 set of news links focused on hedge fund and finance industry updates 
- 1 set of analytical links focused on security analysis, investment process, etc.

If you come across (or have written) something interesting, please don't hesitate to email it over: marketfolly (at) gmail (dot) com.  Today we'll post the first installment of the 'analytical links' and tomorrow will feature the 'hedge fund links.'  Enjoy!

Analytical Links


The Success Equation: Untangling Skill & Luck in Business, Sports and Investing [Mauboussin]

A checklist to qualify and disqualify ideas [SimoleonSense]

Curating your financial life [Abnormal Returns]

AIG downgraded as shares appreciate [ValueWalk]

Finding value in HMO's [Contrarian Edge]

Notes on visiting Herbalife (HLF) [Bronte Capital]

12 cognitive biases that prevent you from being rational [io9]

Don't go to business school unless it's a top school [Daily Beast]

Bargain hunting at JC Penney (JCP) [Contrarian Edge]

Ensco (ESV): Drilling deep for value [Barrons]

Indecent proposal for SuperValu (SVU)? [Stone Street Advisors]

Actually worth a read: Jim Cramer's 10 themes for 2013 [TheStreet]

Michael Dell's grand plan? [Term Sheet]

Why console gaming is dying [CNN]

How America drinks: water and wine replace cheap beer and soda [Atlantic]

Bill Ackman Not Throwing In The Towel On J.C. Penney (JCP)

After sales plunged at J.C. Penney, Bill Ackman of Pershing Square Capital appeared on CNBC to talk about his investment.  He has stressed in the past that he's in this investment for many years as the company is a turnaround story.

Ackman originally purchased his stake around $25 and the stock now trades around $18 so he has a paper loss.  He argues that J.C. Penney is now "two companies" with the new startup concept: jcp (the stores within a store concept) and then the old J.C. Penney.

The Pershing Square man essentially argues that since the new jcp concept stores are generating a much higher return per square foot than the original concept, the growth there will be when old stores convert to the new jcp concept and then when the number of 'mini stores' within the store increases.

Embedded below is a video of Bill Ackman's appearance:



For more from this hedge fund manager, we've also posted Ackman's presentation at the Value Investing Congress.

Delivering Alpha Real Estate Panel: Ackman, Sternlicht & Gray

Continuing coverage of CNBC & Institutional Investor's Delivering Alpha Conference, we're now shifting to the real estate panel featuring Pershing Square's Bill Ackman, Starwood Capital Group's Barry Sternlicht and Blackstone Group's Johnathan Gray.

If you missed it, we've also posted up notes from the other panels at the conference.

Bill Ackman (Pershing Square):  Ackman's been in the news recently regarding a new stake in Proctor & Gamble (PG) so naturally he addressed that first saying, "We think it's a great company ... it's a cheap stock, but it's cheap for a reason.  We own the stock, we like the company, we own about $1.8 billion in equity in options."

That's a lot when you frame it in the context of a $10 billion dollar fund.  Recently, Ackman was also saying his PG bet is the largest initial bet on a company he's ever made.  Many have postured that he'll look to shake-up management and examine splitting the business up.

Ackman also touched on his stake in J.C. Penney (JCP), whose shares have been in steady decline.  He argued that it's the only company that can make 15-20x return (seems awful high), attributing the sell-off to a PR problem versus fundamentals.

On the subject of real estate, he advocated buying single family homes, arguing that it's a good business and an "asset class where institutions are underrepresented."  For more from this investor, we just posted up Ackman's recommended reading list.


Barry Sternlicht (Starwood Capital):  He noted that there's enough debt financing and that spreads are tight.  He also pointed out that you don't really see foreign banks here.

Echoing Ackman, Sternlicht says they've been buying houses and thinks the market could even possibly be overbought.  On Europe, he thinks it's still the first inning there so if you get involved, you've got to buy and hold.  We've highlighted thoughts from Sternlicht before in investing lessons learned from Richard Rainwater.


Johnathan Gray (Blackstone):  They bought a lot of commercial real estate near the top of the market but said it's not painful because rents are improving (due to lack of new construction).  He believes there's some opportunity out there to buy things that others aren't interested in.  The caveat, is that financing is harder to obtain than in the past.

Blackstone obviously likes Ackman's notion of buying homes as that's what they've been doing.  Two thousand for $300 million, saying execution is key.  He especially seems to like European deals and thinks the continent is not going into an abyss.  In summary, he wants to buy hard assets at a discount to replacement cost.


Be sure to check out more insights from top investors from the conference:

- Best ideas panel

- Global opportunities panel

- Chase for yield panel

Why Lone Pine's Steve Mandel Likes Kohl's (KSS)

At the Ira Sohn Conference last month, Steve Mandel of hedge fund Lone Pine Capital talked about how he was long Kohl's (KSS) and bearish on fixed income.  Since KSS was the only particular stock he spoke of, we thought it was worth examining why Mandel likes Kohl's.

During Steve Mandel's presentation, he noted that he likes "share count shrinkers": companies that use free cashflow to shrink the number of outstanding shares by 8% to 10% annually.  He cited KSS as an example as the company has gone from 30 stores to national over 20 years and they have higher sales than J.C. Penney (JCP).

Mandel said that at $46, the stock trades less than 10x 2012 eps and is buying back stock.  The bear case on the name is that the company is viewed as 'obsolete' as internet retailers take market share.

Now, the above is direct from Mandel.  But we wanted to take it a step further to look for other potential reasons as to why Lone Pine might like the stock.


Kohl's: Best of a Bad Bunch

The following is a guest post from valuhunteruk.com: 

Kohl’s is a national chain of 1,100+ department stores with a moderate focus toward the Midwest/West regions of the US. Department stores generally got very hard hit by the market decline in 2008 and they have slumped since the end of 2009 so valuations are quite reasonable with Kohl’s trading at roughly 10x trailing earnings.

If we first look to Kohl’s operating performance we find that this it is an able competitor. The competitors I have chosen to focus on are those in the Department Store Index apart from Sears: Nordstrom (NYSE: JWN), Macy’s (NYSE: M), Dillard’s (NYSE: DDS), and J.C. Penney (NYSE: JCP). On the basis of these comparisons Kohl’s should be trading at a slightly more ambitious multiple.

The core of this advantage appears to be structural — Kohl’s stores are on average far smaller than competitors. For example, Nordstrom’s average store is 211,000 square feet, Dillard’s is 174,000 but Kohl’s is only 87,000. As a result, Kohl’s SGA (selling, general, and administrative) costs are the lowest in the industry at the per store level. Coping with pressure on the top-line is far easier with this kind of advantage.

Another advantage from smaller stores is high sales per square foot. Nordstrom is way in the lead here with $400 of sales per square foot but Kohl’s with $190 per square foot is way above everyone else. Again, it appears that that these smaller stores allow Kohl’s some protection against changes in the top line and allow it to use its space more effectively.

(click to enlarge)

Kohl's historicals are just as strong.  Over the past five years, Kohl’s has continued to expand adding 198 stores and nearly 16,000,000 square feet of capacity whilst the rest of the sector, except Nordstrom, has stood still.

More surprisingly, whilst this expansion has led to declining sales figures at a per store and per square foot level, the pace of decline is comparable to that experienced  by the sector as a whole. It has outpaced Dillard’s, the clear laggard, and only Macy’s managed to prevent declines in sales per store and per square foot over the past five years.

(click to enlarge)

At an operating level, it is difficult to understand that the market has attached to Kohl's.  On the basis of trailing P/Es, Kohl’s trades at a 30% discount to Nordstrom and a 14% discount to Macy’s.

On an EV/store basis, this gap is even larger although this is surely complicated by accounting for leases. Considering the fact that Kohl’s has the second highest pre-tax margins in the industry, a structurally lower cost base, and more potential for expansion we may argue that this discount is unwarranted.

(click to enlarge)

The company is also attractive at a financial level, which seemed to be the focus of Stephen Mandel's decision.  Kohl’s has just begun paying dividends but it is the share buyback program that is most interesting. In 2010, the company bought back just under 19m shares worth $1bn and in 2011, Kohl’s bought back just under 46m shares worth $2.3bn. In the first quarter of 2012, $325m worth of shares were bought back.

This program is being achieved through drawing down the company’s cash balance, which amounts to a modest re-leveraging. However, despite the substantial repurchases already made, EBIT/Interest Expense (inc. rental expenses) was 7.2x at the end of January 2012. The company expects to return another $1bn through 2012.

On both a financial and operating basis, the case for Kohl’s looks strong. However, in this sector one always has to consider the effect of broader movements in consumer spendings. Pundits are widely divided on where the economy is going although, as might be expected, the recent decline in broad market indexes has led to a wave of negativity.

For this sector, one should bear in mind that over the last five years (the longest period for which results are comparable) there was very little to choose between the companies in terms of sales growth.

Certainly, Kohl’s and Nordstrom were boosted by continued store expansion but the standard deviation of sales growth for the group was steady around 5.7%. Kohl’s definitely stands out in the sector, but the investor must feel comfortable with taking the risk of investing in the department store sector as a whole.



To see what other US stocks this prominent hedge fund owns, head to the new issue of our premium research: Hedge Fund Wisdom.