J.C. Penney – The End is Near
I keep waiting for an internet meme to appear with a picture of activist investor, Bill Ackman with a smirk on his face and the following title underneath: “J.C. Penney: Miss me yet?” After all, since Ackman resigned from the board of directors almost 2 months ago and sold his hedge fund’s nearly 18% stake in the struggling retailer, J.C. Penney has been in a steady decline and appears headed for bankruptcy.
Ackman apologized to his investors after his public showdown with J.C. Penney’s fellow board members came to a head towards the end of summer. He realized that J.C. Penney was on life support, but he truly believed there was value in the company if management was willing to move fast on certain decisions. In particular, he wanted to replace the company’s interim CEO as well as the Chairman of its Board of Directors. There were differences of opinion on the right strategy to “right the ship”, but there simply was not an opportunity for the board to engage in a drawn-out debate over J.C. Penney’s future. The company had been losing cash since 2008. A significant loss in its customer base and an overall decline in sales had resulted in J.C. Penney’s shares plummeting 35% since the beginning of the year. Ackman, realizing that his impasse with the board would not permit the changes he believed were necessary, resigned from the board and sold his fund’s nearly 39 million shares at a price of $12.90 a share. It was an estimated loss of $500MM for Ackman and his Pershing Square Capital Management.
Although he was heavily criticized for the failure of the investment, it seems now that he was right in wanting to implement drastic action in order to try and save the company. At the very least, it appears he saved his investors significant sums by selling when he did. Consider the events that have transpired since Ackman’s departure from J.C. Penney:
- Goldman Sachs released a research report suggesting investors should take out insurance on J.C. Penney’s debt;
- One of J.C. Penney’s largest remaining shareholders, hedge fund Perry Capital, appeared to raise the white flag last week after it was disclosed in SEC filings that it had sold 9 million shares of the company’s stock – reducing its stake to just over 3%; and
- J.C. Penney announced a plan this week to sell more than $900 million in new stock in order to raise cash ahead of the important holiday season.
At the close of yesterday’s market, J.C. Penney’s shares were trading at $8.75. As analysts continue to paint a bleak picture of the company’s immediate future, there is fading hope for a successful turnaround.
I am not making an argument that Ackman could have saved the company. In reality, it is likely that nothing could or will save J.C. Penney. This is a company whose run has simply ended. It can’t compete with the other major retailer in its space. Nevertheless, give credit to Ackman for at least attempting to take the company in another direction when the status quo was no longer tenable.