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Analyzing Pershing Square's positions in 3Q 2013

Part 2
Analyzing Pershing Square's positions in 3Q 2013 (Part 2 of 6)

Will J.C. Penney survive a turnaround after Ackman’s stake sale?

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Pershing Square Capital Management is a New York–based activist hedge fund founded and run by Bill Ackman. Ackman started the firm in 2004 with $54 million from his personal funds and from his former business partner, Leucadia National. News reports in October claimed that the fund has seen its assets under management decline by $1.2 billion from $12.4 billion in March, mainly due to setbacks in investments made in J.C. Penney Co. (JCP) and a large bet against Herbalife Ltd. (HLF).

In this six part series, we’ll go through some of the main positions Pershing Square Capital Management LP traded this past quarter.

The fund bought no new positions in 3Q 2013. It added to its positions in Air Products & Chemicals (APD), and reduced its positions in General Growth Properties, (GGP) Canadian Pacific Railway (CP), and Procter & Gamble (PG). It sold its positions in J.C. Penney (JCP).

Abbreviated financial summaries and metrics for these securities are included below. Detailed analysis and recommendations require a subscription (more information at the bottom of the article).

Why sell J.C. Penney (JCP)?

Pershing Square Capital sold a 6.09% position in J.C. Penney in 3Q 2013, according to its 3Q 2013 13F filing. News reports in August stated that Pershing owned an approximately 18% stake in the retailer that was sold to Citigroup Inc. The $504 million stake sale came after Ackman resigned from J.C. Penney board’s on August 12 following months of public battle with the company’s management on the CEO succession plan. In a letter to investors, Ackman acknowledged that Pershing Square has lost around half of its original investment in J.C. Penney.

Pershing had begun building its stake in the company three years ago, becoming the biggest shareholder in the process. After joining the company’s board in February 2011, Ackman pushed for changes, replacing CEO Myron Ullman III with Ron Johnson. However, Johnson’s strategy failed to pay off, as J.C. Penney saw a $985 million loss for the year ended in February and sales declined 25%—the worst in two decades. Earlier in 2013, the board fired Johnson and reinstated Ullman. Ackman then tried to push for replacing the board chairman Thomas J. Engibous with Allen Questrom. In August, J.C. Penney adopted a poison pill to prevent an activist from acquiring more than 10% of the company. After Ackman’s stake sale, it was reported that Hayman Capital, Perry Capital, and Glenview Capital Management acquired positions in the company. Hayman Capital’s Kyle Bass recently announced that he sold his shares in JCP.

In 3Q 2013, J.C. Penney reported reported a net loss of $457 million, or $1.81 per share, excluding the restructuring and management transition charges, primary pension plan expense, and net gain on the sale of a non-operating asset. It saw net sales of $2.78 billion compared to $2.93 billion in 3Q 2012. Comparable store sales declined 4.8% for the quarter, which represented a sequential improvement of 710 basis points compared to 2Q 2013. The quarter ended with a positive 0.9% comparable store sales gain in October. Also, sales results improved sequentially each month within the quarter. Online sales through JCP.com were $266 million for the quarter, up 24.5% versus the same period last year and reflecting sequential increases through the quarter. CEO Myron Ullman stated that the company’s strategies to reconnect with customers are beginning to take hold and it’s committed to building on its progress by winning in the holiday season.

The company recently provided an update stating that for November, which includes the important Thanksgiving weekend, the company’s comparable store sales grew 10.1% over last year. It also noted that its e-commerce sales through JCP.com remained strong, running well ahead of last year, consistent with last month’s trend. It anticipates increases in same-store sales and gross margins sequentially and year-over-year in 4Q 2013. Wells Fargo viewed the acceleration as “much less impressive.” The stock is down 60% year-to-date.

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Pershing Square Capital uses fundamental analysis with a value orientation employing extensive research and thorough due diligence in its decision-making process. It uses a unique mix of value investing and an activist approach in sifting through and identifying investments.

Founder Bill Ackman has a Bachelor of Arts degree magna cum laude from Harvard College in 1988 and an MBA from Harvard Business School in 1992.

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