J.C. Penney Company, Inc. (JCP), Macy’s, Inc. (M): A Hedge Fund Legend Thinks There’s Life Here

Moribund retailer J.C. Penney Company, Inc. (NYSE:JCP) isn’t dead yet. In fact hedge fund legend George Soros thinks the decaying department store chain has a future.

J.C. Penney Company, Inc. (NYSE:JCP)J.C. Penney Company, Inc. (NYSE:JCP)’s stock price shot up by around a dollar a share when Soros disclosed the fact that he has purchased a 7.9% stake in the retail basket case. So what’s old George doing here? J.C. Penney Company, Inc. (NYSE:JCP) has had a pretty miserable time of it in recent years; the company’s same store sales fell by 16.6% in the first quarter of 2013, and the company’s sales fell by around $3 billion between fiscal years 2012 and 2013.

Numbers proves Penney’s is worse than you thought

Those numbers translated into a negative year to year revenue growth rate of more than 20% and a negative diluted earnings per share figure of $3.5. The EPS and the revenue growth were not the only figures in the negative at J.C. Penney Company, Inc. (NYSE:JCP). The company reported a net income of -$985 million on Jan. 31, 2013. That’s right, Penney’s income fell nearly a billion dollars in the fiscal year 2013.

The drop in stock value from $33 a share on May 14, 2012 to $15.50 a share on April 5 seems justified. Yet something interesting has been happening at JC Penney (NYSE:JCP)’s. Its share value has been rising for over a month; it was trading at $18.90 a share at the end of business on May 15. The interesting thing is that this rise in value appears to have begun long before Soros’ stake became public. Something is definitely going on at J.C. Penney Company, Inc. (NYSE:JCP)’s.

Is Soros crazy like a fox?

If you judge by the numbers, Soros looks crazy here–but is he crazy like a fox? Soros is not a stupid man; he’s pulled some rabbits out of hats before, usually by betting against the market.

Perhaps Soros smells a bargain here; he is a contrarian, and he might believe that all the media hype about the problems at J.C. Penney Company, Inc. (NYSE:JCP)’s is overstated. Soros likes to bet against the market. Like Warren Buffett, he’s a firm believer in Ben Graham’s Mr. Market hypothesis—the belief that the market is insane and often acts irrationally.

Soros might think that J.C. Penney’s share value collapse over the last year was based on hysteria rather than market factors. He might also be looking at some of the numbers for other department stores out there. The story at another big department store chain shows some very different numbers.

Success story at Macy’s could point way for JC Penney

Even though J.C. Penney’s troubles have been grabbing all the headlines in recent months, things are going very well at another big old-line department store operator: Macy’s, Inc. (NYSE:M). Macy’s, Inc. (NYSE:M) might just be what Soros is looking at when he buys JCP.

Macy’s, Inc. (NYSE:M) share value has been on a tremendous rise in the last year, from $33 a share on July 11, 2012, to $49 a share at the close of business on May 15, 2013. To be fair, Macy’s, Inc. (NYSE:M) did post some really good financial numbers that justify that share price. It’s year to year revenue number grew by 4% in 2013. Macy’s, Inc. (NYSE:M) diluted EPS grew by 6% in the same period. Macy’s, Inc. (NYSE:M) sales were also expected to be up slightly in this quarter, $6.4 billion vs. $6.2 billion for the year before.

Here’s what Soros may see: J.C. Penney’s and Macy’s are a lot alike.  Both are old-line department store chains. Both operate mostly in big shiny stores in malls and both sell pretty much the same merchandise. Yet one is doing great and one isn’t.

Macy’s stuck to its guns and its old way of doing business and made money. J.C. Penney didn’t; it was led astray by a marketing genius. Now the marketing genius is gone, and J.C. Penney’s is getting back to basics. It has the same basic physical plant as Macy’s and the same merchandise.

Will what worked at Macy’s work at Penny’s?

Soros might be betting that J.C. Penney’s could achieve the same kind of sales as Macy’s and start making money again if it simply gets back to doing what it does best. Macy’s clearly demonstrates that you can make money by running an old fashioned department store at the mall.  True, you won’t make the kind of profits we’ve seen at Costco Wholesale, but you can make a healthy amount of cash.

Soros’ big bet is that if J.C. Penney’s can turn its sales figures around to something like we’re seeing at Macy’s, its stock price will recover. Macy’s has shown that old fashioned marketing methods like coupons and discounts work in the department store business.

It isn’t a bad bet; after all, Macy’s sales figures still prove that people are shopping at the mall. Macy’s has also shown us that those shoppers still respond to the kind of traditional advertising and marketing campaigns that J.C. Penney’s is turning back to. Its example shows that J.C. Penney’s can be turned around fairly easily.

The numbers over at Macy’s indicate that J.C. Penney’s industry and basic business model are still very viable. All it really needs is some new leadership and a return to proven retail methods that real customers respond to.

Soros’ bet is not crazy

Soros’ stake in J.C. Penney and the recent rise in share price for that chain are not crazy at all. The performance of Macy’s, the company that most resembles J.C. Penney, demonstrates that Soros’ reputation as an alchemist isn’t so far-fetched. It also demonstrates old George’s ability to see the underlying conditions rather than the media hype.

Despite the frenzy of media attacks in recent months, J.C. Penney is far from dead. Instead, old-line department stores are still in business and still making money. Consumer spending may not have recovered, but some department stores, such as Macy’s and Nordstrom, are doing fine.

Retailers good buy

The lesson Soros is giving investors here is clear: There is still a lot of life left in old-line retailers. Many of them are cheap right now, but they’re still generating a lot of cash. Sooner or later the market will notice that and share prices will rise accordingly. Old-fashioned retail stocks are a good bet right now, particularly the ones like J.C. Penney that the pundits have pronounced dead.

The article An Investing Legend Thinks There Is Life in This Company originally appeared on Fool.com.

Nauman Aly has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Nauman is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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