T2 Partners

8/3/2019 T2 Partners

1/83

Many Ways to Win

Value Investing CongressOctober 18, 2011


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T2 Partners Management L.P.

Manages Hedge Funds and Mutual Funds

and is a Registered Investment Advisor

The General Motors Building

767 Fifth Avenue, 18th Floor

New York, NY 10153

(212) 386-7160

[email protected] www.T2PartnersLLC.com


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-3-

Disclaimer

THIS PRESENTATION IS FOR INFORMATIONAL AND EDUCATIONALPURPOSES ONLY AND SHALL NOT BE CONSTRUED TO CONSTITUTEINVESTMENT ADVICE. NOTHING CONTAINED HEREIN SHALL CONSTITUTEA SOLICITATION, RECOMMENDATION OR ENDORSEMENT TO BUY ORSELL ANY SECURITY OR OTHER FINANCIAL INSTRUMENT.

INVESTMENT FUNDS MANAGED BY WHITNEY TILSON AND GLENNTONGUE OWN STOCK IN MANY OF THE COMPANIES DISCUSSED HEREIN.THEY HAVE NO OBLIGATION TO UPDATE THE INFORMATION CONTAINEDHEREIN AND MAY MAKE INVESTMENT DECISIONS THAT AREINCONSISTENT WITH THE VIEWS EXPRESSED IN THIS PRESENTATION.

WE MAKE NO REPRESENTATION OR WARRANTIES AS TO THE

ACCURACY, COMPLETENESS OR TIMELINESS OF THE INFORMATION,TEXT, GRAPHICS OR OTHER ITEMS CONTAINED IN THIS PRESENTATION.WE EXPRESSLY DISCLAIM ALL LIABILITY FOR ERRORS OR OMISSIONS IN,OR THE MISUSE OR MISINTERPRETATION OF, ANY INFORMATIONCONTAINED IN THIS PRESENTATION.

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS AND

FUTURE RETURNS ARE NOT GUARANTEED.


4/83

Our Analysis of Berkshire Hathaway,

Which Is, By Far, Our Largest Position


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-5-

Berkshire Hathaway: A High-Quality,

Growing 65-Cent Dollar

History

Berkshire Hathaway today does not resemble the company thatBuffett bought into during the 1960s

Berkshire was a leading New England-based textile company, with

investment appeal as a classic Ben Graham-style net-net Buffett took control of Berkshire on May 10, 1965

At that time, Berkshire had a market value of about $18 million andshareholder's equity of about $22 million


6/83

The Berkshire Hathaway Empire Today

Stakes in Public CompaniesWorth $1+ Billion

Note: Shares as of 12/31/10; Stock prices as of 10/7/11.

-6-

Company Shares Price Value ($B)

Coca-Cola 200.0 $65.90 $13.2

Wells Fargo 358.9 $24.54 $8.8

American Express 151.6 $43.43 $6.6

Procter & Gamble 72.4 $63.91 $4.6

Kraft 97.2 $33.76 $3.3Johnson & Johnson 45.0 $63.13 $2.8

Munich RE 19.3 $128.77 $2.5

Wal-Mart 39.0 $53.70 $2.1

ConocoPhillip s 29.1 $64.16 $1.9

Sanofi-A ventis 25.8 $71.59 $1.9

U.S. Bancorp 78.1 $23.33 $1.8

POSCO 3.9 $40,424 $1.6

Tesco 242.2 $6.33 $1.5
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The Basics

Stock price (10/17/11): $109,690

$72.89 for B shares (equivalent to $109,335/A share)

Shares outstanding: 1.649 million

Market cap: $181 billion

Total assets (Q2 11): $383 billion

Total equity (Q2 11): $163 billion

Book value per share (Q2 11): $98,716

P/B: 1.11x

Float (Q2 11): $71 billion


8/83-8-

Earnings of Non-Insurance Businesses Have Soared Thanksto Burlington Northern and the Economic Rebound

* In 2010, Berkshire changed this table from Earnings before income taxes, noncontrolling interests and equity method earnings to Earnings before income taxes. Thus, 2008-2010reflect the new numbers, and all prior years reflect the old ones.** Burlington Northerns run rate annual operating profits are approximately $4.1 billion.

Earnings before taxes* 2004 2005 2006 2007 2008 2009 2010

Insurance Group:GEICO 970 1,221 1,314 1,113 916 649 1,117

General Re 3 -334 523 555 342 477 452

Berkshire Reinsurance Group 417 -1,069 1,658 1,427 1,222 250 176

Berkshire H. Primary Group 161 235 340 279 210 84 268

Investment Income 2,824 3,480 4,316 4,758 4,896 5,459 5,145

Total Insurance Oper. Inc. 4,375 3,533 8,151 8,132 7,586 6,919 7,158

Non-Insurance Businesses:

Burlington Northern Santa Fe** 3,611

Finance and Financial products 584 822 1,157 1,006 771 653 689

Marmon 733 686 813

McLane Company 228 217 229 232 276 344 369MidAmerican/Utilities/Energy 237 523 1,476 1,774 2,963 1,528 1,539

Other Businesses 2,253 2,406 3,297 3,279 2,809 884 3,092

Total Non-Insur. Oper. Inc. 3,302 3,968 6,159 6,291 7,552 4,095 10,113

Total Operating Income 7,677 7,501 14,310 14,423 15,138 11,014 17,271


9/83-9-

Quarterly Earnings of Key Business Units

* In 2010, Berkshire changed this table from Earnings before income taxes, noncontrolling interests and equity method earnings to Earnings before income taxes, but a breakdown

of Q1-Q3 numbers in 2008-2010 isnt available, so we use the old numbers for Q1 -Q3 of each year, but to get the Q4 numbers in 2008-2010, we subtract from the full-year numbers,which causes slight anomalies in Q4 08, Q4 09 and Q4 10.

Earnings before taxes* Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11

Insurance Group:

GEICO 295 325 335 158 186 298 246 186 148 111 200 190 299 329 289 200 337 159

General Re 30 230 157 138 42 102 54 144 -16 276 186 31 -39 222 201 68 -326 132

Berkshire Reinsurance Group 553 356 183 335 29 79 -166 1,280 177 -318 141 250 52 117 -237 244 -1,343 -354

Berkshire H. Primary Group 49 63 77 90 25 81 -8 112 4 29 7 44 33 48 52 135 56 54

Investment Income 1,078 1,236 1,217 1,227 1,089 1,204 1,074 1,529 1,354 1,482 1,412 1,211 1,283 1,494 1,218 1,150 1,261 1,404

Total Insurance Oper. Inc. 2,005 2,210 1,969 1,948 1,371 1,764 1,200 3,251 1,667 1,580 1,946 1,726 1,628 2,210 1,523 1,797 -15 1,395

Non-Insurance Businesses:

Burlington Northern Santa Fe 476 974 1,127 1,034 965 1,070

Finance and Financial products 242 277 273 214 241 254 163 113 112 115 119 307 111 155 140 283 156 177

Marmon 28 261 247 197 162 170 194 160 190 219 212 192 222 273

McLane Company 58 72 50 52 73 68 68 67 143 66 64 71 80 109 89 91 82 105

MidAmerican/Utilities/Energy 513 372 481 408 516 329 526 1,592 303 402 441 382 395 338 416 390 451 320

Other Businesses 723 1,015 1,020 957 744 956 798 516 206 201 350 271 583 860 844 805 675 976

Total Non-Insur. Oper. Inc. 1,536 1,736 1,824 1,631 1,602 1,868 1,802 2,485 926 954 1,168 1,191 1,835 2,655 2,828 2,795 2,551 2,921

Total Operating Income 3,541 3,946 3,793 3,579 2,973 3,632 3,002 5,736 2,593 2,534 3,114 2,917 3,463 4,865 4,351 4,592 2,536 4,316


10/83-10-

Berkshire Is Becoming Less of an Investment

Company and More of an Operating Business

Source: 2010 annual letter.

*


11/83

(10)

(5)

0

5

10

15

20

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 H1 11

Acquisitions Net Stock Purchases

-11-

After a Two-Year Hiatus, Berkshire

Is Acquiring Stocks Again

Hes doing a good job but the cash is coming in so fast! A high-class problem

Markets have a way of presenting big opportunities on short notice Chaos in 2008, junk bonds in 2002 Buffett has reduced average maturity of bond portfolio so he can act quickly

$B

Cash paid, mostly forBurlington Northern

(the total value of the company atacquisition was $34 billion)

Starting to buy stocks again

(plus Buffett said he bought$4 billion of stocks in Q3)


12/83-12-

Buffett Invested Large Amounts of

Capital During the Downturn in 2008

Investment/Commitment Amount (Bn) Comment

Mars/Wrigley $6.5

Auction rate securities $6.5 Q2 event; sold much in Q3

Goldman Sachs $5.0 Plus $5B to exercise warrants

Constellation Energy stockand preferred

$5.7 Sold for a $1.1B gain incl.breakup fee

Marmon $4.5 The remaining 34.6% not

owned by BRK will bepurchased from 2011-14

General stock purchases $3.3 Full year; net of sales

Dow/Rohm & Haas $3.0

General Electric $3.0 Plus $3B to exercise warrants

Fed. Home Loan Disc. Notes $2.4 Q2 event; sold much in Q3

Tungaloy $1.0 Iscar acquisition

Swiss Re unit $0.8 Plus sharing agreement

ING reinsurance unit $0.4

Other businesses purchased $3.9

TOTAL $46.0 Plus $8B to exercise GS &GE warrants

Note: Does not include capital committed to Berkshires new bond insurance business, Berkshire Assurance


13/83-13-

Valuing Berkshire

Over the years we'veattempt[ed] to increase our marketable investments inwonderful businesses, while simultaneously trying to buy similar businesses in theirentirety. 1995 Annual Letter

In our last two annual reports, we furnished you a table that Charlie and I believe iscentral to estimating Berkshire's intrinsic value. In the updated version of that table,which follows, we trace our two key components of value. The first column lists ourper-share ownership of investments (including cash and equivalents) and the second

column shows our per-share earnings from Berkshire's operating businesses beforetaxes and purchase-accounting adjustments, but after all interest and corporateexpenses. The second column excludes all dividends, interest and capital gains thatwe realized from the investments presented in the first column. 1997 Annual Letter

In effect, the columns show what Berkshire would look like were it split into two parts,with one entity holding our investments and the other operating all of our businesses andbearing all corporate costs. 1997 Annual Letter


14/83-14-

Buffetts Comments on Berkshires Valuation Lead

to an Implied Multiplier of Approximately 12

1996 Annual Letter: Today's price/value relationship is both much different from whatit was a year ago and, as Charlie and I see it, more appropriate.

1997 Annual Letter: Berkshire's intrinsic value grew at nearly the same pace as book

value (book +34.1%) 1998 Annual Letter: Though Berkshire's intrinsic value grew very substantially in

1998, the gain fell well short of the 48.3% recorded for book value. (Assume a 15-20% increase in intrinsic value.)

1999 Annual Letter: A repurchase of, say, 2% of a company's shares at a 25%discount from per-share intrinsic value...We will not repurchase shares unless webelieve Berkshire stock is selling well below intrinsic value, conservativelycalculated...Recently, when the A shares fell below $45,000, we considered making

repurchases.

Pre-tax EPSExcluding All Year-End

Investments Income From Stock Intrinsic Implied

Year Per Share Investments Price Value Multiplier

1996 $28,500 $421 $34,100 $34,100 13

1997 $38,043 $718 $46,000 $46,000 11

1998 $47,647 $474 $70,000 $54,000 131999 $47,339 -$458 $56,100 $60,000


15/83

Pre-tax EPS

Excluding All SubsequentInvestments Income From Intrinsic Value Year Stock

Year End Per Share Investments Per Share Price Range

2001 $47,460 -$1,289 $64,000 $59,600-$78,500

2002 $52,507 $1,479 $70,000 $60,600-$84,700

2003 $62,273 $2,912 $97,000 $81,000-$95,700

2004 $66,967 $3,003 $103,000 $78,800-$92,000

2005 $74,129 $3,600 $117,300 $85,700-$114,200

2006 $80,636 $5,200-$5,400 $143,000-$144,400 $107,200-$151,650

2007 $90,343 $5,500-$5,700 $156,300-$158,700 $84,000-$147,000

2008 $75,912 $5,727 $121,728 (8 multiple) $70,050-$108,100

2009 $91,091 $3,571 $126,801 (10 multiple) $97,205-$128,7302010 $94,730 $7,200 $166,730 (10 multiple) ?

Q2 2011 $95,500 $7,200 $167,500 (10 multiple) ?

Estimating Berkshires Value: 2001 2011

1. Unlike Buffett, we include a conservative estimate of normalized earnings from Berkshires insurance businesses.

2. Actual result was $6,492, but we reduce this to assume the 2nd

-worst year ever for super-cat losses.3. Actual result was $6,270 but we reduce the pre-tax, pre-investment-income margins of the insurance businesses by 400 basis points(from 14% to 10%) to reflect Buffetts guidance in the Annual Report.

Given compressed multiples at the end of 2008, we used an 8 rather than a 12 multiple.Weve now increased this to a 10 multiple, still below the historical 12 multiple we believe Buffett uses.

-15-

1

2

3


16/83

Berkshire Is 35% Below Intrinsic Value,

Close to a Multi-Decade Low

Intrinsic value*

* Investments per share plus 12x pre-tax earnings per share (excluding all income from investments) for theprior year, except for YE 2008 (8 multiple) and YE 2009 onward (10 multiple).

Intrinsic value estimate of

$169,500 using 10 multiple

35% discount tointrinsic value

-16-


17/83

12-Month Investment Return

Current intrinsic value: $167,500/share

Plus 5% growth of intrinsic value of the business

Plus cash build over next 12 months: $7,000/share

Equals intrinsic value in one year of $182,875

67% above todays price

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18/83-18-

Catalysts

Meaningful share repurchases

Continued earnings growth of operating businesses

$1+ billion of pre-tax earnings from Lubrizol

New equity investments

Additional cash build Eventually, Berkshire could win back a AAA rating (not likely in

the near term)

Potential for more meaningful acquisitions and investments

If theres a double-dip recession, this becomes more likely


19/83-19-

Berkshires New Share Repurchase Program

On September 26th, Berkshire announced the first formal sharerepurchase program in Berkshires history, and only the second timeBuffett has ever offered to buy back stock

Its unusual in three ways:

1. Theres no time limit

2. Theres no dollar cap

3. Buffett set a price: no higher than a 10% premium over the then-current book value of the shares. In the opinion of our Board andmanagement, the underlying businesses of Berkshire are worthconsiderably more than this amount

Book value at the end of Q2 was $98,716 ($65.81/B share); weestimate that book value today has declined slightly to perhaps$97,000 ($64.67/B share).

Thus, a 10% premium means that Buffett is willing to buy back stockup to $106,700 ($71.13/B share), roughly 3% below todays price


20/83-20-

The Share Repurchase Program Has Significantly Improved

the Risk-Reward Equation, So We Bought More Stock

It confirms that Buffett shares our belief that Berkshire stock is deeplyundervalued

He wouldnt be buying it back at a 10% premium to book value if he thought itsintrinsic value was, say, 20% or even 30% above book

Our estimate is nearly $170,000/share, more than 50% above todays levels

Buffett put a floor on the stock: he was clear in numerous interviews after

the program was announced that he is eager to buy back a lotof stockand he has enormous cash to do so:

Berkshire has $43.2 billion of cash (excluding railroads, utilities, energy, financeand financial products), plus another $34.8 billion in bonds (nearly all of whichare short-term, cash equivalents), which totals $77 billion

The press release notes that repurchases will not be made if they would reduce

Berkshires consolidated cash equivalent holdings below $20 billion, so thatleaves $57 billion to deploy, equal to nearly one-third of the companys currentmarket cap

On top of this, the company generated more than $6.5 billion in free cash flow inthe first half of the 2011 in other words, more than $1 billion/month is pouringinto Omaha

Buffett can buy back a lot of stock andcontinue to make other investments

Berkshire Stock Outperformed the S&P 500 by 83


21/83

-21-

Berkshire Stock Outperformed the S&P 500 by 83

Percentage Points in the Year After the Only Other

Time Buffett Offered to Buy Back Stock

Berkshire Hathaway

S&P 500

March 11, 2000 March 11, 2001

Up 72%

Down 11%


22/83

-22-

Risk: Who Will Replace Buffett?

When Buffett is no longer running Berkshire, his job will be split into twoparts: one CEO, who has not been named, and a small number of CIOs(Chief Investment Officers) Two have been named already, Todd Combs and Ted Weschler, who both appear to be

excellent investors

Nevertheless, Buffett is irreplaceable and it will be a significant loss when

he no longer runs Berkshire for a number of reasons: There is no investor with Buffetts experience, wisdom and track record, so his successors

decisions regarding the purchases of both stocks and entire business might not be as good

Most of the 75+ managers of Berkshires operating subsidiaries are wealthy and dont needto work, but nevertheless work extremely hard and almost never leave thanks to Buffettshalo and superb managerial skills. Will this remain the case under his successors?

Buffetts reputation is unrivaled so he is offered deals (such at the recent $5 billion

investment in BofA) on terms that are not offered to any other investor and might not beoffered to his successors

Being offered investment opportunities on terms/prices not available to anyone else alsoapplies to buying companies outright. Theres a high degree of prestige in selling onesbusiness to Buffett. For example, the owners of Iscar could surely have gotten a higherprice had they taken the business public or sold it to an LBO firm.

Buffetts Rolodex is unrivaled, so he gets calls (and can make calls that get returned) that

his successors might not


23/83

-23-

Arent We Concerned About the Uncertainty

of Berkshire After Buffett?

Answer: Not really, for two primary reasons:1. Buffett isnt going anywhere anytime soon. We think its at least

80% likely that Buffett will be running Berkshire for five moreyears, and 50% likely hell be doing so for 10 more years Buffett turned 81 on Aug. 30th and is in excellent health

There are no signs that he is slowing down mentally in fact, he appears to begetting better with age

A life expectancy calculator (http://calculator.livingto100.com) shows thatBuffett is likely to live to age 93 (12 more years)

2. The stock is very cheap based on our estimate of intrinsic value(nearly $170,000/A share), which does not include anyBuffettpremium We simply take investments/share and add the value of the operating

businesses, based on a conservative multiple of their normalized earnings

The value of the cash and bonds wont change, and Coke, American Express,Burlington Northern, GEICO, etc. will continue to generate robust earnings

even after Buffetts gone


24/83

-24-

The Real Buffett Risk

Buffett is often asked (as are we): What would happen to thecompany (and stock) if you got hit by a bus (i.e., die suddenly)? If it happened tomorrow, our best guess is that the stock would fall 10-15%

(which would give Berkshire the opportunity to buy back a lot of stock if it wastrading below 110% of book value)

But this isnt likely. Not to be morbid, but most people dont die suddenly from

something like an accident or heart attack, but rather die slowly: their bodies(and sometimes minds) break down gradually

A far greater risk to Berkshire shareholders is that Buffett begins to lose itmentally and starts making bad investment decisions, but doesnt recognize it(or refuses to acknowledge it because he loves his work so much) and theboard wont take away the keys, perhaps rationalizing that a diminished Buffettis still better than anyone else

Buffett is aware of this risk and has instructed Berkshires board members, bothpublicly and privately, that their most important job is to take away the keys ifthey see him losing it

We trust that both Buffett and the board will act rationally, but also view it as ourjob to independently observe and evaluate Buffett to make sure werecomfortable that hes still at the top of his game. Today, we think hes neverbeen better.


25/83

-25-

An Analogy with Apple & Steve Jobs

The most comparable example of a business that, like Berkshire,is closely associated with its legendary founder and CEO is Apple As Steve Jobss health began to fail, he assumed fewer day-to-day

responsibilities, passing them to top lieutenants

Jobs resigned as CEO on Aug. 24, 2011 and died exactly six weeks later

Apples stock on the first trading days after his retirement and death were

announced declined less than 1%, as this chart shows:

First day oftrading afterSteve Jobsannouncesretirement

First day oftrading afterSteve Jobs dies


26/83

-26-

Other Risks

A double-dip recession impacts Berkshires earnings materially No catalyst occurs, so the stock sits there and doesnt go up

Intrinsic value will likely continue to grow nicely

Berkshires stock portfolio declines

Losses in the shorter-duration derivatives such as credit-defaultswaps are larger than expected and/or mark-to-market lossesmount among the equity index puts

A major super-cat event occurs that costs Berkshire many billions

Berkshire is downgraded


27/83

-27-

Conclusion

Cheap stock: 65-cent dollar, giving no value to recentinvestments and immense optionality

Extremely safe: huge cash and other assets provide downsideprotection

Strong earnings should eventually act as a catalyst


28/83

Our Analysis of J.C. Penney,

Our Second-Largest Position


29/83

-29-

Summary of Investment Thesis

A decent business that has underperformed But this is NOT Sears/K-Mart

A fairly valued stock based on current performance 5.6x EV/EBITDA; 18.1x P/E

An extraordinary combination of people, covering the key value

drivers, have come together to bring about change and you getthis for free New top management: Ron Johnson and Michael Francis

Real estate: Steve Roth, Vornado

Capital allocation: Bill Ackman, Pershing Square

The business has been undermanaged, so there are many areasfor improvement that can drive enormous value creation Increase sales/sq. foot

Cut costs

Unlock real estate value

Optimize capital structure


30/83

-30-

The Basics

Stock price (10/17/11): $29.99

Shares outstanding: 213.3 million

Options and warrants: 24.8 million

Market cap: $6.4 billion Enterprise Value: $7.9 billion

Book value per share (7/31/11): $22

Sales: $17.7 billion

P/E (LTM): 18.1x

EV/EBITDA (LTM): 5.6x

P/S: 0.36x

JCP St k H D Littl O


31/83

-31-

JCPs Stock Has Done Little Over

the Past Decade

JCPs Stock Since Activists


32/83

-32-

JCPs Stock Since Activists

Investments

JCP reports May SSS -1%

JCP announces RonJohnson as next CEO

JCP reports June SSS +2% (vs. KSS+7.5%, M +6.7%); lowers EPS guidance

JCP reports July SSS +3.3%

JCP reports Aug SSS -1.9%

Pershing Sq. and Vornadoinvestment announced


33/83

JCP Valuation vs. Peers

-33-

JCP Comp group Mkt Cap EV TEV/EBITDALTM

P/E (LTM)

Dillard's Inc. (NYSE:DDS) 2,575 3,353 5.1x 13.9x

Kohl's Corp. (NYSE:KSS) 13,593 16,118 5.9x 12.7x

Macy's, Inc. (NYSE:M) 12,497 18,078 5.5x 12.0x

Nordstrom Inc. (NYSE:JWN) 10,681 12,393 7.9x 16.8x

Target Corp. (NYSE:TGT) 35,753 52,448 7.1x 12.6x

The TJX Companies (NYSE:TJX) 21,986 21,715 7.9x 17.3x

Average 6.6x 14.2x

J. C. Penney (NYSE:JCP) 6,408 7,956 5.7x 18.1x


34/83

JCPs History

-34-

James Cash Penney opens TheGolden Rule, a dry goods and clothing

store, in Kemmerer, Wyoming

Store sales exceed $1Bfor first time

J.C. Penney issues itsfirst catalogue

Company launchesjcpenney.com, itsonline store

Incorporated in Utahas the J.C. Penney

Corporation

Moved headquarters

to NYC

Moved headquarters

to Plano, Texas

Exits cataloguebusiness

AnnouncesSephora inside

jcpenney concept

Myron Ullman III joinsas companys 9th

Chairman and CEO

1902 1913 1914 1951 1963 1992 1994 2004 2006 2010 2011

Ron Johnson to beginas 10thCEO 11/1/11


35/83

JCP operates 1,106 department stores in 49 states and PR JCP owns 426 of its 1,106 stores (38.5% of stores, ~42mm sq. ft.)

and 17 of its 26 distribution/warehouse centers (~12m sq. ft.)

JCPs real estate alone could be worth over $3b (total EV of $7.9b)

JCPs Broad Footprint

-35-


36/83

Revenues Over the Past Decade

-36-

Revenue Growth Has Been a Zero


37/83

Revenue Growth Has Been a Zero

Sum Game

-37-


38/83

EBIT Over the Past Decade

-38-


39/83

EBITDARP Over the Last Decade

-39-* Earnings before interest, taxes, depreciation, amortization, rent and pension expense;assumes $302mm LTM rent expense


40/83

A Diverse Business Mix

-40-

Womens apparel,

24%

Mens

apparel/accessories,

20%

Home, 18%

Womensaccessories,

12%

Childrens

apparel, 11%

Footwear, 7%

Fine jewelry, 4%

Services and other,4%


41/83

Private Brands

-41-

49% of revenue comes from private brands developed,designed, and sourced in-house

Billiondollarbrand

Billiondollarbrand


42/83

National Brands

-42-

45% of revenue comes from national brands


43/83

Exclusive Brands

-43-

6% of revenue comes from exclusive brands/conceptsa major opportunity


44/83

Investment Thesis

New management team & active Board of Directors

Opportunity for operational improvement

Significant real estate value

Capital structure optimization

-44-


45/83

Investment Thesis





-45-


46/83

Ron Johnson Left Apple for JCP

Ron Johnson, 52, beings as new CEO on Nov. 1st

After graduating from Harvard Business School,was one of only a few of his classmates to go intoretailing, at Mervyns

Mervyns was acquired by Target, where Johnsonrose to become senior vice president ofmerchandising

During his 15 years there, Target got hip, wentnational, and crushed sales records[His trackrecord is nuts. The Atlantic

In 2000, Steve Jobs hired him to lead Apples retailstores

Today: More than 350 stores worldwide, generatingsales of over $4,000/sq. ft.

Credited with the Genius Bar concept

-46-

Ron Johnsons Motivation, Incentives


47/83

Ron Johnson s Motivation, Incentives

and Alignment With Shareholders

"I've always dreamed of leading a major retailcompany as CEO, and I am thrilled to have theopportunity to help J. C. Penney re-imagine what Ibelieve to be the single greatest opportunity inAmerican retailing today, the Department Store. Ron Johnson, 6/14/11

Johnson forfeited150k AAPL restricted stock units

(RSUs) granted in 2008 (that vest in 2012) and

100k RSUs granted in 2010 (that vest in 2014) witha market value of $73 million

In return, he only received 1.7m JCP RSUs thatvest 1/27/12, worth roughly $50 million

In addition, Johnson personally invested $50m tobuy warrants to acquire 7.3m JCP shares at$29.92. They expire 7.5 years and Johnson cannot

sell or hedge them for six years-47-

Michael Francis Left Target for


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Michael Francis Left Target for

JCP

Michael Francis, 48, begins as JCPs President onNov. 1

Francis will be responsible for merchandising,

marketing, product development and sourcing

21 years at Target (1990-2011) 2011: Led Targets expansion into Canada

Chief Marketing Officer (Aug 08- Sept 11)

EVP Marketing (Feb 03 Aug 08)

Francis began his merchandising and marketing career

as an executive trainee on the sales floor of MarshallFields in Chicago in 1986

-48-

P hi S I l t


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-49-

Pershing Squares Involvement

As of 9/22/11 13-D filing: Pershing Square owns 39.1m shares (18.3%) and

has economic exposure to 16.6m shares (7.8%)through total return swaps for total economicexposure of 55.6m shares or 26.1% of shares

outstanding

Pershing Square gave up some voting rights toincrease ownership

The 8/19/11 stockholders agreement limits

Pershing Square from exceeding 26.1% ownership Bill Ackmanjoined JCP

board Feb 2011


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Vornados Involvement

As of 10/8/11 13-D filing:

Vornado owns 23.4m shares (9.9%)

The 9/16/11 stockholders agreement allowsVornado to buy up to 15.4% of common stock

Steven Roth has extensive real estate expertise andan extraordinary history of value-creation

-50-

Steven Rothjoined JCP

board Feb 2011

C E i P i $30 h


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Current Equity Price: $30 per share

-51-

Market

value ofequity

I Th i


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Investment Thesis





-52-

O t it f S l I t


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-53-

Opportunity for Sales Improvement

Sales per sq. ft. are below peers and remain -14%

below 2007 peak levels vs. peer average of -8%

$177/sq. ft.in FY 2007

$153/sq. ft.

in FY 2010

JCPs Net Promoter Score Has Been


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JC s Ne o o e Sco e s ee

Rising Steadily, Outpacing Peers

-54-

Note: Net promoter score is percent of people who answer 9 or 10 minus those who answer 0-6 when asked, on a scale

of 0-10, How likely is it that you would recommend our company to a friend or colleague?Source: JCP 2010 investor day, pp 93 of 120

Dramaticimprovementsince 2003

I iti ti #1 S h I id JC P


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Initiative #1: Sephora Inside JC Penney

Expected to have ~30% storebase penetration by YE 2011

-55-

Sephora Brand Awareness Is Rising and


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p g

Should Drive Increased JCP Traffic

-56-

Google Trends indicates Sephora searchtraffic is up roughly +50% YTD in 2011

Initiative #2: Liz Claiborne


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-57-

Initiative #2: Liz Claiborne

Liz Claiborne is one of the most recognized brands in the history ofAmerican apparel retailing with a deeply loyal following, and our

research shows that it is among the most desired by the J.C. Penneycustomer. CEO Myron Ullman

October 2011: J.C. Penney acquires worldwide rights for the Liz Claibornefamily of brands as well as the U.S. and Puerto Rico rights for the

Monet brand for $267.5 million.

I iti ti #3 G O li S l


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Initiative #3: Grow Online Sales

Online sales have beenflat for 4+ years

-58-Source: Credit Suisse, 10/4/11

JCP Sales Opportunity Could Add


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pp y

$8/share in Value

-59-

Currentstockprice

$8$38

15% improvement in sales

per sq. ft. = $8 to equity

There Is Significant Opportunity for


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g pp y

Margin Improvement

EBITDAR margins are 380 bps below peak levels vs.peers on avg. at or above former peak levels

-60-

13.1% inFY 2007

9.3% inFY 2010

EBITDARP Margins Have Also


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g

Been Weak

-61-

EBITDARP margins are 280 bps below peak levelswhile peers are hitting new highs

13.8% in

FY 2006

11.0% inFY 2010

J.C. Penney Spends Much More on


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y p

Advertising Than Its Peers

-62-

Penney Dumps Big Book Catalog ChiefMarketer Network, 11/18/09

Retailer J.C. Penney is discontinuing its traditional catalogbusiness in favor of look books, which refer consumers to thecompany's e-commerce site. Direct Marketing News, 9/28/10

Margin Improvement Could Add


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g

$15 in Value

-63-

Sales per sq. ft.improvement

300 bps EBITDAimprovement =$15 to equity

$53

Current

stockprice

$8 $8

Investment Thesis


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Investment Thesis





-64-

JCP Real Estate Portfolio (1)


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-65-


JCP real estate is worth $12 - $15 per share



66/83


-66-

Property and Equipment, Net

Land N/A $ 315 $ 308

Buildin s 50 4,434 4,276

Furniture and e ui ment 3-20 2,271 2,356

Leasehold im rovements 1,065 1,118

Accumulated depreciation (2,854) (2,701)

Property and equipment, net $ 5,231 $ 5,357

2010 2009($ in millions)

Estimated

UsefulLives

(Years)

Source: JCP 2010 10-K

$20/share in gross book value of buildings



67/83


JCP spends ~$300m/yr to rent the 62% of stores it doesnot own

JCP pays itself ~$180mm in synthetic rent for the 38%of company-owned stores

$2.3b of owned real estate value (owned stores, groundleased stores, owned distribution centers) implies 8%cap rate on the synthetic rent

-67-

Valuation Based on Separate Retailer


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and Real Estate Earnings Stream

-68-JCP trades at 3.8x LTM EV/EBITDAP, adjusting for real estate value

Sale-Leaseback & Implied EBITDAP Multiple

Low Case Mid Case High Case

Value of Real Estate $2,058 $2,339 $2,620

Assumed Cap Rate 8.0% 8.0% 8.0%

Implied NOI of Real Estate $165 $187 $210

Current LTM EBITDAP $1,584 $1,584 $1,584

Rent Expense Impact to EBITDA (165) (187) (210)

Pro Forma LTM EBITDAP $1,419 $1,397 $1,374

Current TEV $7,689 $7,689 $7,689Less: Real Estate Value (2,058) (2,339) (2,620)

Implied Firm Value $5,631 $5,350 $5,069

Implied EBITDAP Multiple 4.0x 3.8x 3.7x

JCPs Real Estate Could Be


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Worth $13/share

-69-

Base valueof retail

business

Marginimprovement

Realestatevalue


Currentstockprice

$8 $8

$8

$65

$13

Investment Thesis


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Investment Thesis





-70-

Share buyback: $900m Spent in 1H11


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Share buyback: $900m Spent in 1H11

Feb. 2011: Board authorized up to $900m repurchase

Q1 11: JCP bought back 21m shares for $787m

Q2 11: JCP bought back 3m shares for $113m

Completed program on 5/6/11

Average price of $36.98

-71-

Debt Ratios


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Debt Ratios

-72-Source: Capital IQ

Additional REIT Assets


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Additional REIT Assets

REIT assets valued 7/30/11 at $300m = $1.40/share-73-

Value of REIT Assets

JCPs Total Value Could Exceed $70,


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More Than Double Todays Price

-74-

Capital structureoptimization

$70+?

Marginimprovement


Currentstockprice

$8 $8

$8$13

Real estatevalue

Base valueof retail

business

$8$13

Real estatevalue

Base valueof retail

business

$65

Conclusion: Many Ways to Win


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-75-

Conclusion: Many Ways to Win

Buy a decent, undermanaged business at a fair priceand get an extraordinary combination of people,representing significant optionality, for free


76/83

Appendix

Managements Goal is EPS of

$


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$5 by 2014

-77-Source: 1Q11 company presentation

Managements Goal is EPS of

$5 b 2014 (2)


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$5 by 2014 (2)


Management Sees Revenue Growthf M S


79/83

from Many Sources


5-Year Income Statement


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5 Year Income Statement

-80-

JC Penney Income Statement FYE 02/03/2007 FYE 02/02/2008 FYE 1/31/2009 FYE 1/30/2010 FYE 1/29/2011

Total Revenue 19,903 19,860 18,486 17,556 17,759Cost Of Goods Sold 12,078 12,189 11,571 10,646 10,799

Gross Profit 7,825 7,671 6,915 6,910 6,960

Selling General & Admin Exp. 5,470 5,402 5,395 5,382 5,350

Pension Expense 51 (45) (90) 337 255

Pre-Opening Costs 27 46 31 28 8

Depreciation & Amort. 389 426 469 495 511

Other Operating Expense/(Income) (35) (37) (36) (35) (23)

Other Operating Exp., Total 5,902 5,792 5,769 6,207 6,101

Operating Income 1,923 1,879 1,146 703 859

Interest Expense (270) (278) (268) (255) (223)Interes t and Inves t. Income 135 118 37 10 11

Net Interest Exp. (135) (160) (231) (245) (212)

Other Non-Operating Inc. (Exp.) 5 7 6 (15) (19)

EBT Excl. Unusual Items 1,793 1,726 921 443 628

Restructuring Charges - - - - (32)

Gain (Loss) On Sale Of Assets 8 10 10 2 8

Asset Writedow n (2) (1) (21) (42) (3)

Other Unusual Items (7) (12) - - (20)

EBT Incl. Unusual Items 1,792 1,723 910 403 581

Income Tax Expense 658 618 343 154 203

Earnings from Cont. Ops. 1,134 1,105 567 249 378

Earnings of Discontinued Ops. 19 6 5 2 11Net Income to Company 1,153 1,111 572 251 389

NI to Common Excl. Extra Items 1,134 1,105 567 249 378

Per Share Item s

Basic EPS Excl. Extra Items $ 4.95 $ 4.96 $ 2.55 $ 1.07 $ 1.60

Weighted Avg. Basic Shares Out. 229.0 223.0 222.0 232.0 236.0

Diluted EPS Excl. Extra Items $ 4.88 $ 4.90 $ 2.54 $ 1.07 $ 1.59

Weighted Avg. Diluted Shares Out. 232.0 225.0 223.0 233.0 238.0

5-Year Balance Sheet


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5 Year Balance Sheet

-81-

5-Year Cash Flow Statement


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ea Cas ow State e t

-82-

JC Penney Cash Flow Statement FYE 02/03/2007 FYE 02/02/2008 FYE 1/31/2009 FYE 1/30/2010 FYE 1/29/2011

Net Income 1,153.0 1,111.0 572.0 251.0 389.0Depreciation & Amort. 389.0 426.0 469.0 495.0 511.0

Depreciation & Amort., Total 389.0 426.0 469.0 495.0 511.0

(Gain) Loss From Sale Of Assets (8.0) (12.0) (10.0) (2.0) (8.0)

Asset Writedow n & Restructuring Costs 4.0 5.0 29.0 48.0 40.0

Stock-Based Compensation 60.0 45.0 53.0 43.0 56.0

Tax Benefit from Stock Options 6.0 9.0 - - -

Net Cash From Discontinued Ops. 11.0 8.0 (5.0) (2.0) (11.0)

Other Oper ating Activ ities ( 376.0) (124.0) ( 32.0) 352.0 (69.0)

Change In Inventories (190.0) (241.0) 382.0 235.0 (189.0)

Change in A cc. Pay able 195.0 106.0 (278.0) 32.0 (93.0)

Change in Inc. Taxes (1.0) (66.0) (36.0) (57.0) 28.0

Change in Other Net Operating Assets 26.0 (10.0) 12.0 178.0 (62.0)

Cash from Ops. 1,269.0 1,257.0 1,156.0 1,573.0 592.0

Capital Expenditure (772.0) (1,243.0) (969.0) (600.0) (499.0)

Sale of Property, Plant, and Equipment 20.0 26.0 13.0 13.0 14.0

Other Investing Activities (32.0) (25.0) - - -

Cas h fr om Inve sting (784.0) (1,242.0) (956.0) (587.0) (485.0)

Short Term Debt Issued - - - - -

Long-Term Debt Issued - 980.0 - - 392.0

Total Debt Issued - 980.0 - - 392.0

Short Term Debt Repaid - - - - -

Long-Term Debt Repaid (21.0) (737.0) (203.0) (113.0) (693.0)

Total Debt Repaid (21.0) (737.0) (203.0) (113.0) (693.0)

Iss uance of Common Stock 135.0 45.0 4.0 4.0 8.0

Repurchase of Common Stock (750.0) (400.0) - - -

Common Div idends Paid ( 153.0) (174.0) (178.0) ( 183.0) ( 189.0)

Total Divide nds Paid (153.0) (174.0) (178.0) (183.0) (189.0)

Special Dividend Paid - - - - -

Other Financ ing A ctivities 38.0 0 (3.0) (35.0) (14.0)

Cas h fr om Financing (751.0) (286.0) (380.0) (327.0) (496.0)

Ne t Change in Cas h (266.0) (271.0) (180.0) 659.0 (389.0)

JCP vs. Comps


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J p

JCP Comp group Px Shares

Out

Mkt Cap LTM Net

Debt

EV LTM Rev LTM

EBITDA

LTM Adj

EPS

NTM Rev NTM

EBITDA

NTM EPS

Dillard's Inc. (NYSE:DDS) 50.03 51.5 2,575 779 3,353 6,324 657 3.59 - - -

Kohl's Corp. (NYSE:KSS) 50.45 269.4 13,593 2,525 16,118 18,666 2,754 3.97 19,554 3,007 4.76

Macy's , Inc. (NYSE:M) 29.26 427.1 12,497 5,581 18,078 25,720 3,293 2.43 26,505 3,304 2.76

Nordstrom Inc. (NYSE:JWN) 50.7 210.7 10,681 1,712 12,393 10,231 1,563 3.01 10,754 1,655 3.35

Targe t Corp. (NYSE:TGT) 52.95 675.2 35,753 16,695 52,448 68,441 7,402 4.21 71,327 7,488 4.21

The TJX Companie s (NYSE:TJX) 57.71 381.0 21,986 (271) 21,715 22,546 2,744 3.34 23,708 3,129 4.19

J. C. Penney (NYSE:JCP) 30.04 213.3 6,408 1,548 7,956 17,741 1,399 1.66 17,647 1,290 1.74

JCP Comp set TEV/Total

Rev LTM

TEV/EBITDA

LTM

TEV/EBIT

LTM

P/E (LTM) TEV/Fwd

Rev

TEV/Fwd

EBITDA

Dillard's Inc. (NYSE:DDS) 0.53x 5.1x 8.5x 13.9x 0.5x 5.1x

Macy's , Inc. (NYSE:M) 0.70x 5.5x 8.3x 12.0x 0.7x 5.5x

Kohl's Corp. (NYSE:KSS) 0.86x 5.9x 8.2x 12.7x 0.8x 5.4x

Targe t Cor p. (NYSE:TGT) 0.77x 7.1x 9.9x 12.6x 0.7x 7.0x

The TJX Companie s (NYSE:TJX) 0.96x 7.9x 9.5x 17.3x 0.9x 6.9x

Nordstrom Inc. (NYSE:JWN) 1.21x 7.9x 10.2x 16.8x 1.2x 7.5x

J. C. Penney (NYSE:JCP) 0.45x 5.7x 9.0x 18.1x 0.5x 6.2x

JCP Comp se t NTM Fwd

P/E

Gross

Mrgn (LTM)

EBITDA Mrgn

(LTM)

EBIT Mrgn

(LTM)

Rev growth

(LTM)

EBITDA gr owth

(LTM)

Dillard's Inc. (NYSE:DDS) 12.2x 36.9% 10.4% 6.2% 2.5% 24.1%

Kohl's Corp. (NYSE:KSS) 10.6x 38.4% 14.8% 10.6% 4.5% 2.2%

Macy's , Inc. (NYSE:M) 10.6x 40.6% 12.8% 8.5% 6.1% 13.5%

Nordstr om Inc. (NYSE:JWN) 12.6x 37.2% 15.3% 11.9% 11.1% 20.9%

Targe t Cor p. (NYSE:TGT) 13.8x 29.9% 10.8% 7.8% 2.8% 4.4%

Th TJX C i (NYSE TJX) 15 2 26 9% 12 2% 10 1% 6 0% 1 0%

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