Will J.C. Penney Survive?

J.C. Penney (JCP) continues making news as Board Member Bill Ackman left the Board of Directors on Tuesday.

Ackman is a billionaire hedge fund manager whose Pershing Square Capital Management has been in a battle with company officers and other board members for the last two years.

J.C. Penney (JCP) remains under serious cash flow pressure as its executive suite has become a revolving door of departures and its efforts to become an upscale, trendy retailer have apparently failed. Sales have dropped sharply (25% in 2012) and the company’s stock is down some 30% since last May. Ackman and his company hold approximately 18% of J.C. Penney and is the company’s largest shareholder.

Bill Ackman says he isn’t going to sell his stock, however, analysts say the company’s future is uncertain. Retail (XRT) has been weak, in general, as today’s July retail sales index came in at 0.2%, missing expectations and well below last month’s 0.6% growth rate. The next test for the company will be the back to school sales and upcoming Holiday season.

Penney’s problems began during the tenure of former CEO Ron Johnson, a former executive at Apple, who was hired as Penney’s CEO by Bill Ackman. Johnson left JCP in April, after the company lost nearly one billion dollars purportedly as a result of store policy changes made at Johnson’s behest. Some of the changes included an end to discount pricing and doing away with coupons. Johnson also arranged the controversial licensing deal with Martha Stewart.

Johnson was replaced by his predecessor, Myron Ullman, who had previously served as Penney’s CEO for seven years. Despite the change, Penney’s share price has slumped. On September 11 of 2012, JCP was trading at $29.47 per share. On April 9, the share price was down to $13.93. After Johnson was replaced by Ullman, JCP was trading at $19.39 per share by May 24. Nevertheless, JCP’s share price quickly began to fade and exactly one month later, JCP shares were down to $15.42.

Ullman had been intended to serve until the board could find a new CEO, although the search did not begin until last month, after a four-month delay. Meanwhile, Ackman was getting anxious. He demanded that Ullman be replaced by way of a letter which he made public on August 8.

He accused Ullman of making key hiring decisions without first consulting with the board of directors. At the same time, Ackman publicly called for the resignation of Chairman Thomas Engibous, who responded with pushback, accusing Ackman of being “disruptive and counterproductive”. In a subsequent letter on August 9 (which Ackman also made public) Ackman emphasized that J.C. Penney’s “very existence is at risk”.

Although Ackman has insisted that Ullman be replaced within six weeks, other board members have emphasized how the corporate bylaws mandate that replacement of an officer can occur only when a majority of the board votes for the dismissal by way of a special shareholders’ meeting.

Many board members were outraged over the fact that Ackman had gone public with this battle. The Wall Street Journal reported that on Sunday afternoon, the board of directors held a teleconference to consider the possibility of bringing a legal action against Ackman. A number of stock analysts began calling for the resignation of Ackman from the JCP board. Reports began to surface that Soros Fund Management, which owns a nearly 8-percent stake in J.C. Penney, had sided with Ullman and Engibous against Ackman. The news was not surprising, since George Soros has been very critical of Ackman’s short position on Herbalife Limited, which Ackman has described as a pyramid scheme.

By August 12, a number of reports were citing sources from J.C. Penney, who revealed that the board is preparing to name a new director as early as August 20, who has experience in the retail business. There is also a wider effort under way to resolve the very public feud between Ackman and the JCP board of directors. The issue concerning the future of Myron Ullman as CEO has yet to be resolved, according to the reports.

Although the news gave the JCP share price a 2.33 percent boost on Monday, will the enthusiasm continue? Penny’s needs to get a campaign under way yesterday to attract holiday shoppers. At this point, it is probably too late to address the “back to school” shopping season. New investors need to feel confident that a turnaround can be accomplished. The company’s stock declined 3.7% on August 13th even as the general market indexes closed higher.

Bottom line: J.C. Penney is #215 on the S&P 500 and operates more than 1,000 stores in the United States. It’s ranked #6 among major U.S. retailers and problems here will ripple across the retailing industry and consumer sector. (XLY)

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