September 23, 2021

JC Penney Sales Plunge as Shoppers Spurn Price Strategy

Still, Johnson told investors on Friday that he was “100 percent committed” to his plan for the century-old retailer, which includes eliminating most coupons and sales events and converting about 700 of its 1,100 stores into collections of boutiques, such as Levi’s Denim Bar.

But the new strategy appears to keep driving customers away, with traffic down 12 percent in the third quarter.

J.C. Penney shares tumbled 9.7 percent to $19.58 in premarket trading.

Same-store sales fell 26.1 percent in the latest quarter, ended October 27, while analysts had expected a decrease of 17.9 percent.

Same-store sales declines have gotten worse each quarter under the new strategy, falling 18.9 percent in the first quarter and 21.7 percent in the second quarter.

Walter Loeb, president of retail management consultant Loeb Associates, expressed concern about Penney’s performance during the upcoming holiday shopping season.

“I expect a big drop in sales” Loeb said. “(Johnson) must generate traffic. I think he has to be more promotional.”

There have been signs that the first few boutique shops, which include Izod and Liz Claiborne, have won over customers, but they represent only a small fraction of sales.

Johnson is supported by activist investor William Ackman, whose Pershing Square Capital Management is Penney’s largest shareholder and who was at the investor presentation on Friday.

In a statement, Johnson, who took the reins at J.C. Penney a year ago, said this was a “tale of two companies,” with the old Penney still struggling and the new stores surpassing his expectations.

Penney made some concessions during the third quarter. Last month it offered a $10 gift coupon, and it recently held “30 percent off” clearance promotions. But Loeb said the company needs to do much more.

Penney said its net loss narrowed to $123 million, or 56 cents per share, in the third quarter from $143 million, or 67 cents per share, a year earlier.

Excluding a gain from the sale of noncore assets and other one-time items, Penney said it lost 93 cents a share.

Sales fell 26.6 percent to $2.93 billion.

Internet sales fell 37.3 percent to $214 million. Many retailers are working to increase their online sales.

“The data says J.C. Penney is not a top destination and is nowhere near becoming a top destination in peak seasonal shopping periods,” Brian Sozzi, chief equities analyst at NBG Productions, said in a research note.

Gross margin fell to 32.5 percent of sales from 37.4 percent a year earlier, hurt by lower-than-expected sales and increased clearance sales.

(Reporting by Phil Wahba in New York; additional reporting by Brad Dorfman in Chicago; Editing by Lisa Von Ahn and John Wallace)

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DealBook: Hedge Funds Get Unfamiliar Taste of Losing

Lee Ainslie, managing partner at Maverick Capital Management.Daniel Acker/Bloomberg NewsFunds suffering losses include Maverick Capital, run by Lee Ainslie, above, and those run by John A. Paulson of Paulson Company. John Paulson of Paulson  CompanyJin Lee/Bloomberg News

For hedge funds, just one week can change their entire year.

With the stock market shedding billions of dollars in value and uncertainty in Europe stoking fear, some funds are watching their returns sink by double digits while others are shooting the lights out. August, in less than two weeks, has brought a 13 percent decline in the Standard Poor’s 500-stock index and roughly 12 percent drop in the Dow Jones industrial average.

The turmoil has whipsawed some of the biggest names in hedge funds. John A. Paulson, for example, who made billions betting against subprime mortgages in the last market downturn, is racking up big declines in this one, in part because of his exposure to financial companies.

One of his main funds is down 31 percent this year — and that was even before this week’s carnage in the market. William A. Ackman’s Pershing Square Capital Management, meanwhile, is down about 10 percent this year, with most of the loss coming this month, said a person briefed on the firm’s performance.

Pershing Square, which declined to comment, has major positions in companies like Citigroup and J.C. Penney — two stocks that declined sharply recently.

But doomsday funds, which position themselves to pay off in the event of a calamity, are awash in money. One such fund, Universa Investments, spent the year positioning itself for such a decline — buying instruments that profit in the event of collapse but that lose money when markets are steady or climbing. Because of August’s rout, the firm is now up roughly 25 percent on the year, according to a person close to the fund who asked for anonymity because the information was private. 36South Capital Advisors, a London-based manager that also thrives in market calamity, is up nearly 70 percent in one fund.

“Our philosophy is more like a trapper: we set volatility traps and the market falls into them,” said Jerry Haworth, the head of 36South, which returned more than 200 percent in 2008. “We seem to have a windfall every time there is a systemic crisis. All the traps seem to get sprung.”

Bridgewater Associates and Brevan Howard, both among the largest hedge funds in the world, have also notched gains amid the market fallout, according to people familiar with the funds who requested anonymity because the information was private.

A different manner of trap has befallen some other hedge funds. Maverick Capital, for instance, an $11 billion fund run by Lee Ainslie, has lost 11 percent in one of its funds in August, according to an investor in the fund. Chilton Investment Company, which manages about $7.5 billion, has seen returns in its largest fund drop 8.5 percent since the start of the month.

Both funds engage in a strategy known as long-short equity, where managers have the latitude to bet on both the up and the down of a given stock. Because these hedge funds engage almost exclusively in stock markets, as opposed to buying up debt or loaning money, their returns are often more exposed to the broad market performance.

Maverick, which is closely watched by investors across Wall Street, has heavy exposure to Corning, Goodrich, and JPMorgan Chase, according to its most recent regulatory filings, companies whose share prices have fallen sharply in recent weeks.

For Chilton, founded in 1992 by Richard L. Chilton, the poor performance in a number of energy companies like EOG Resources and Patriot Coal have helped contribute to a lackluster August.

Industry watchers say it has been a tough month for such traders because when markets collapse, it doesn’t matter how well you pick stocks. While many of these managers pride themselves on knowing which companies are undervalued and which are overpriced, everything tends to decline during a big market sell-off.

“They’re the most directly tied to the markets,” said Tarek Helal, vice president for the Alternative Investments Group at Raymond James. “They’re also the least hedged. It seems like some of the names these folks were in are getting killed on the equity side.”

Both Maverick and Chilton began the month on decent footing, signaling the devastating effect just a few days can have on even the savviest investors. Both firms declined to comment on returns.

One investor that did not begin the month on solid footing and is now in an even more precarious position is Mr. Paulson’s hedge fund firm, Paulson Company. Returns for its flagship funds have been sliding. In the first week in August, the leveraged version of the flagship fund was down 11 percent, bringing the year-to-date losses to 31 percent.

A spokesman for Paulson Company declined to comment.

Mr. Paulson, who has been considered one of the most successful investors on Wall Street, has been a fixation among market participants this year as his giant hedge fund has teetered.

The funds acing the markets this year are the ones betting against it. Often, these funds are called “tail risk” funds, which refers to an event with less than a half percent likelihood of occurring. The strategy often involves purchasing the option to buy or sell a stock at a preset price.

As stock markets fall, these funds profit because they own the option to sell shares in a given index, say the S.P. 500, at a much higher level.

At the giant bond fund Pimco, such strategies have grown increasingly important. Vineer Bhansali, a managing director at the firm, said the performance of its tail risk product has helped increase both internal performance as well as that of outside investors. But for Pimco, it’s meant to be insurance, not a lucrative strategy.

“We don’t think of this as something that you time and exit or trade around too much,” he said. “We think of this as a core part of our asset allocation decision making.”

Peter Lattman contributed reporting.

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DealBook: Quiet Proxy Season Means Fewer Fights in the Boardroom

Deal ProfessorHarry Campbell

Proxy season is a bust.

Shareholder activism intended to spur change in the boardroom is down significantly so far this year. At the same time, activism by hedge funds to oppose takeover transactions is rising. It appears that hedge funds prefer to battle takeover titans rather than fight for corporate governance issues. If this trend holds, it could change the way corporate America operates.

Proxy season appeared to get a fast start in the fall. Back then, the prominent activist hedge fund Pershing Square Capital Management announced that it had taken sizable positions in J. C. Penney and Fortune Brands.

These announcements heralded another contentious proxy season. It didn’t happen.

Instead, as the proxy advisory firm Institutional Shareholder Services noted in a research note last week, only four efforts by hedge funds to replace directors have come to a vote in the first four months of the year. This increased to five on Friday, when Mario Gabelli’s Gamco Management lost a proxy contest to place two directors on Myers Industries’ board.

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According to Factset Sharkrepellent, we typically see about eight such votes by the end of April. The lower numbers reflect a reduction in hedge funds willing to start a proxy contest to replace directors. Last year there were 18 proxy contests through April, but this year there were only 10.

And some of these fights are leading to quick settlements. Of the 10 proxy contests that were to be voted on since the beginning of this year, five have been settled, three went to a vote with the dissident winning in two, and two were withdrawn. The Pershing Square investments never even came to a proxy fight: J. C. Penney and Fortune Brands quickly reached understandings with the hedge fund.

These trends are mirrored in the entire season’s figures. According to Factset Sharkrepellent, only 44 proxy fights have been announced as of April 27. At this point in 2009 there were 82 such announcements.

Because companies increasingly require that notice of a proxy contest be given further in advance, it is unlikely that any more proxy contests will be announced this season. There will certainly not be the kinds of battles we have seen in the past years, like those involving Barnes Noble, CSX and Target.

The only action in proxy season thus far this year appears to be “say on pay.” These are recently enacted Securities and Exchange Commission rules requiring a nonbinding shareholder vote on compensation. The law firm Schulte Roth Zabel reports that in the first 30 days of these rules being in effect, compensation proposals were approved at 93 of 95 companies.

And the corporate governance activist Lucian A. Bebchuk at Harvard Law School and his American Corporate Governance Institute have continued to push for boards to hold annual elections of directors instead of electing directors in one-third tranches each year, making them harder to unseat.

But these are minor currents in what has been a general decline in corporate governance activism.

The takeover activism market is hot, though. Last year, according to Factset Sharkrepellent, 4.6 percent of takeovers faced some type of shareholder activism. In the first four months of this year, the rate has more than doubled to almost 10 percent. This is up from about 3 percent of deals in 2005.

A variety of factors appear to be coming together to explain the decline in shareholder corporate governance activism.

The stock market is in bull territory and valuations are rich, meaning fewer easy targets. Yet the economic outlook remains uncertain, so people are unwilling to take the high risks associated with a proxy contest.

There also appears to be a flow of money out of this sector and into other areas with greater potential for returns. There is not only less money but fewer funds participating in the wake of the financial crisis. Some flame-outs, like Pershing Square’s loss on Target, which at one point approached almost $2 billion, have also highlighted the downside to this type of investing.

Companies themselves are also much less willing to engage in proxy contests. These are very costly, and in a financially volatile environment companies do not want to spend the tens of millions of dollars that a proxy contest costs. They are willing to negotiate, meaning settlements and compromise rather than fights.

The surge in merger-and-acquisition activism highlights these factors. Merger arbitrage funds, which speculate on the outcome of takeover transactions, are performing much better and have greater cash inflows than shareholder activist funds. BarclayHedge reports that there was a substantial net inflow of $4.5 billion into arbitrage funds in 2010, with their net assets going to $31.4 billion from $26.9 billion.

The presence of more arbitragers and money creates a self-fulfilling effect. It means more participants to influence a takeover contest.

Unlike shareholder activism, which requires hard work even if you win a proxy contest, merger activism has quick results. This feeds into the primary reason for the surge in takeover activism. Deal agitation has proved to be the most direct and fastest route to activist results over the last few years. It is much cheaper than corporate governance activism.

The decline of activism is partly cyclical. Proxy contests ebb and flow with the economy and market sentiment. We are in a down cycle right now, but if the economy and stock market remain stable, we are likely to enter another up cycle.

There is also a realization that this is really hard work and that the outcomes are less certain. The hedge fund T.C.I., for example, has left this sector since its disastrous foray trying to elect directors at CSX, which resulted in a loss of more than $250 million. In its note, I.S.S. observed a lack of “second growth” activists. This may be a permanent trend and hinder the recovery of corporate governance hedge funds.

There is a vibrant debate over whether corporate governance activism helps or harms corporate America. Those who attack this type of activity claim that it encourages short-termism. Companies will take short-term measures to bolster their share prices in response to activists, and activists themselves are only in it for the short-term lift, not the long-term health of the company.

Others believe that activism serves as an enforcement mechanism, namely that it forces poorly performing management to be more disciplined. The downturn in activism is thus a real loss if it becomes permanent. The reason is not only because of the disciplining effect this activity brings to the target company, but also because of the general fear these activists inspire. No doubt, corporate America is much more focused on its shareholder base and its operations than it was 10 years ago, in part because of these funds.

The downturn in this activity is therefore troubling, but there is an upside: takeovers are about to get more interesting.

Steven M. Davidoff, writing as The Deal Professor, is a commentator for DealBook on the world of mergers and acquisitions.

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