Ackman drama: Did J.C. Penney just hit rock bottom?

Whether the activist investor's decision to quit the board was voluntary or not, the fact that the chain of events leading to his departure became so public is a sign of just how bad things are at the retailer.

By The Fiscal Times Aug 15, 2013 2:26PM
copyright bilderlounge, beyond fotomedia, Getty ImagesBy Suzanne McGeeThe Fiscal Times logo

For most of the U.S. retailing industry, Wednesday's headlines brought something to savor, even celebrate: the news that retail sales climbed another 0.2% in July, while the data for June was revised upward to show growth of 0.6%. 

Once seasonal and very cyclical factors, such as gasoline and building products, were removed from the mix, the data looked even better, suggesting that retailers have the wind at their backs as they head into the crucial back-to-school shopping season -- second only to the year-end holidays as a source of both revenues and profits.

Then there is J.C. Penney (JCP), where a battle between activist investor Bill Ackman and his fellow board members reached a point of no return. 

Ackman stepped down from the struggling retailer's board, the latest development in a very public squabble about the company's CEO search. Ackman's hedge fund, Pershing Square Capital, still owns about 18% of the company, though, so he's likely to remain a key player at the company.

Whether Ackman's decision was voluntary or not, the fact that the chain of events leading up to the departure became so public is startling -- and a sign of just how bad things are at J.C. Penney. While some analysts have suggested that Ackman's resignation clears the way for the board to concentrate on what it needs to do to save the iconic retailer from complete collapse --starting with recruiting a new CEO -- the market doesn't seem to see it in that upbeat a light: in trading on Tuesday, J.C. Penney's stock plunged another 3.7%, hitting a fresh 52-week low. The shares continued their slide Wednesday, though they were paring losses Thursday.
   
While other retailers have benefitted from modest to healthy gains in same-store sales, the confusion surrounding Penney's strategic direction has taken a toll on customer loyalty and caused shoppers to drift away to the host of other retailers, online or bricks and mortar, vying for their business. "They are one of those retailers that seems almost eager to donate its market share to its rivals," says one retail industry analyst. Companies like Target (TGT) might want to consider sending flowers and chocolates to Ackman and his fellow board members.

It has been three years since Ackman started snapping up shares in Penney, convinced that he could execute a turnaround in the retailer's fortunes. Alas, the individual he chose to oversee the overhaul, and even publicly labeled the Steve Jobs of the retail industry, ex-Apple exec Ron Johnson, turned out to be a failure in the post. Far from focusing on Penney's customers and what they wanted and expected the store to be, he instead decided to make Penney trendier.

Accordingly, he banished discounts, alienating existing customers, and when the turnaround didn't draw droves of hipsters in quest of affordable merchandise, same-store sales plunged by 25%. Ackman backed Johnson until long after nearly everyone else had given up hope that the CEO could work Apple-style magic on the stodgy old-fashioned department store. Eventually, though, even Ackman had to concur with the decision to oust Johnson last year. That move may have been too little, too late.

It's highly unusual for the furious rift between Ackman and his fellow Penney directors to have become so public. Starbucks (SBUX) CEO Howard Schultz captured what a lot of other veteran board directors said privately when he told CNBC's Maria Bartiromo that the decision by Ackman to release two letters he had sent to his fellow Penney directors was "a despicable act" and "irresponsible." One of those letters demanded that the board replace interim CEO Mike Ullman within six weeks; the other asked chairman Tom Engibous to step down as well, since he had lost Ackman's confidence.

Schultz, it must be said, completely lost his cool. Ackman and Johnson "pulled off this strategy that has fractured the company and ruined the lives of thousands of J.C. Penney employees and fractured shareholder value," he said. It's possible that at least part of his ire stems not from Penney's own woes, but from Ackman's diss to Ullman, who is also a member of the Starbucks board.

Schultz's rhetoric highlights a reality of corporate governance, though: Rightly or wrongly, directors tend to have each other's backs in tough times. That's how they can keep working to try to salvage a company like Penney that is battling for its survival. A public declaration that essentially calls the board lackadaisical and charges that it's failing to act in the best interests of shareholders invites eager lawyers to sue not just the company but the directors themselves.

Clearly, the actions (or inaction) of the board members should be scrutinized, along with those of Ackman, Johnson and Ullman. The sum total of their decisions has been to bring a retailer facing some headwinds to the brink of total collapse. But this kind of public calling-out on Ackman's part could end up making serving on the board of any company facing challenges a more risky proposition, and thus one even less likely to appeal to those best suited to the task. Those top candidates and happen to be the ones who have their pick of board seats.

The current J.C. Penney directors are, at least for now, locked into backing Ullman, who struggled to solve the company's challenges as CEO from 2004 until 2011, prompting Ackman's involvement. But they must find a way forward. Returning to the old strategy isn't an option, and Johnson's ideas weren't working. Attempts to blend the two approaches in a kind of makeshift way has simply left both shoppers and Wall Street confused. J.C. Penney is left with few leaders that have a lot of credibility, and not much time left to maneuver.

Nor is the bad news at an end: Next week brings the release of the company's quarterly results. Wall Street is predicting that Penney will announce a loss of $1.07 a share, compared to a loss of only 37 cents in the year-earlier period, with revenues plunging again.

Suzanne McGee is a columnist at The Fiscal Times. Subscribe to The Fiscal Times' FREE newsletter.

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40Comments
Aug 15, 2013 2:58PM
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Don't get me wrong, I hope JC Penney uprights the boat & makes money again but it seems like every other day JC Penney (or Sears) is a top headline.  Give them a chance & stop all this negative publicity that may be scaring shoppers away.  Give them 6 months or so & then give us the Report Card if they can hold on or not. 
It is almost as bad as the New Jersey shore after Superstorm Sandy destroyed a lot of the shore communities.  They have bounced back to a degree & are ready for tourism but there has been so much negative & sensationalized publicity by the media that it basically scarred a lot of people away & the stores & vendors there are losing tons of money.

Aug 15, 2013 3:59PM
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The simple fact remains that the board and/or the executive staff depleted all trust and credibility when they hired Johnson, paid him more money than God himself, to nearly drag the company into bankruptcy, and to top it off, was no wiser than to offer a golden parachute for such nonsense. JCP made it all years delivering value.... Quality at a reasonable price. It seems as though all of the powers that be were equally negligent in making some very bad decisions. Did it ever occur to the board & executives to start someone out with a living wage and promise the moon for whomever delivered results? That's the plan that most JCP employees have to live by, or a rational person would guess that.... If that's not the way they pay salespeople, then shame on them. I'll bet that's the way Mr. Penney operated his business. Otherwise, it would have been liquidated decades ago. These are not difficult decisions..... And what is wrong with sharing some of that wealth with JCP's soldiers who fight on the front lines on a daily basis. The execs robbed the company blind and will ultimately walk with whatever is left over. Absolutely criminal! 
Aug 15, 2013 5:13PM
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I went to the Sioux CIty, Iowa store this weekend.  Fully remodeled.  I bought 3 pairs of $20 Arizona jeans and a $9 Blues Brothers T-shirt.  I had a $10 coupon that brought the total to under $65 with tax.  I have bought Arizona and Levi jeans at JCP forever and I don't expect any problem with these.  At $20 who could have any complaints?
Aug 15, 2013 3:52PM
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Why is Mike Ullman being asked to leave?  And why is the article stressing that the "old" format is not an option?  It seems to me (after recently shopping at Penneys and liking the change back to quite like the old format prior to the recent disaster!) that Ullman is doing OK and bringing the store chain back to what people liked prior to Johnson's debacle.
Aug 16, 2013 2:24AM
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This is the third CEO for J C Penney's, nothing is working except the money is going into the pockets of these crooks.  It has been over three years since this situation has been happening.  My Junk Mail from Penney's is getting worse.  Prices are not coming down but are going up to pay for the bigger salary for these CEO's running it into the ground.  The old saying is, We have to pay them more to keep others from taken them away.  Let the other guys have them, they are not worth the money!!!

This is the same in the Airline Industries with the mergers, Ceo's are getting bigger Salaries, workers have cut in pay, Customers get screwed by higher fares.  
Aug 15, 2013 3:05PM
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Is the new CEO planning on reviving the American Textile industry, hiring union workers to make clothes that fit American bodies and only offering goods that will last a while beyond their warranties instead of pumping extended warranties? You can't fix JC Penney until you fix business platforms and replace the pariah that dwell in their office suites. Look for the union label... I do at Thrift Stores and never cease to be surprised that QUALITY lasts while imported crap get trashed.
Aug 15, 2013 4:34PM
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I went in several stores and the isles are wide, displays nice, quality of clothing very poor.
Aug 15, 2013 4:15PM
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The correct marketing strategy would have been to change the name of the new upscale stores to something other than "Penneys".  Penneys has a brand that consumers relate to value, not trendy.

Ron Johnson (or any other CEO) should have left Penneys stores alone, except for some freshening.  Then, one by one, stores should have been selected for makeover to the trendier stores, then rebranding/naming them something fresher.

Hipsters will never go to a Penneys, no matter how nice it is.  The Penneys brand just doesn't mean "hip" to anybody.  A trendier store needs to resonate with trendier consumers.  And needs a trendier name to draw them in.

The way it was handled at Penneys should be a marketing 101 class on what not to do.
Aug 16, 2013 1:34AM
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I'm still optomistic..I've been buying jcpenney clothing on line for the past year and I'm so pleased with the Worthington and Liz Claiborne women's items. great quality...dresses that are lined like in the old days..no skimpy clothing seams or stretchey pull-over dresses...zippers still on many dresses and skirts. The workmanship on every item I've purchased has been above average.The real biggy is that when you order a size small it isn't the size for a teenager but a figured female adult. JCP is the only place that still uses some quality material and innovative blends of fabrics. My complaint is that if  you don't buy the item in your basket almost immediately, it disappears.( They do give you fair warning that the item is in short supply once you select it.)
Aug 16, 2013 1:09AM
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Went to a jcp in June, looked around, and didn't see much improvements, I thought they were trying to make a comeback.  Their was a lack of stock in clothes, handbags, shoes, and employees.  If they can't go back to plenty of good quality products, then they might as well give it up...
Aug 15, 2013 3:04PM
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The board needs to answer: Why should JCP exist? Tough question.
Aug 15, 2013 4:09PM
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Put God back in their Business Plan and they will be fine!

Aug 16, 2013 8:55AM
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I believe the JCP's board has removed two of their biggest problems and its time to get down to doing business and forget the gimmicks to lure shoppers in.

No matter what is trending at the moment business still should focus on providing quality merchandise, having well stocked shelves and training staff to give outstanding customer service (with a SMILE). 
Aug 16, 2013 11:06AM
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Send catalogs again, everyone loves a sale, and be nice!  Now, send me my money and don't waste it on a CEO.
Aug 16, 2013 11:27AM
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JCP is one of my favorite stores.  Please figure out a way to make it work.  I purchase clothes, kitchen, furniture from this store.  Please, please stop the craziness and make it work.  After all, you all all supposedly "educated" and supposed to know more?????
Aug 15, 2013 3:51PM
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Is this going to help Penneys  return to being a vibrant destination to shop...?
Aug 16, 2013 9:35AM
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i get it, there sorry & trying to come back but, I went back to our JCPenny in our mall in Glen Burnie Md. I could of drove a truck around it? There was nothing to see, was like a dollar store ,just a couple of items "take it or leave it" so I left! Sad , sad, the new "home store motto" stinks! I went to bed ,bath & beyond and had a better day cause guess what "they had a selection! They had plenty of merchandise, they had sales staff at registers! And another thing, JCPenny sold there credit to "CITI BANK " THEY ARE loan sharks, kept changing your due date than "hitting you with a $35 late fee??? As soon as my small balance is paid off, I'm forever done with JCPAIN!
Aug 15, 2013 5:43PM
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The media decides who wins and loses.  Sad but true.  Worst part is the same companies advertise on them.  Remember the coffee spill on the old lady from McDonald's or the green onion scare that occurred at Chi's Chi's.  The media was in the old lady's court , when years later it was the restaurant's fault for the green onion scare. Here's a point for everyone to think about, neither of these INCIDENTS were the restaurants fault. I SMELL  LAWYER'S.
Aug 16, 2013 10:47AM
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The Board of directors did the right thing!  Now the board of directors needs to give there employees higher pay-wage, they can't be working so hard on a low pay wage while all this pressure hits there stores, like less-hours and more work. Last time we shop at a local JC Penney we witness a sales-associate who was working with five checking-out clients and then checking the dressing rooms and assisting clients on the floor, we asked her how much she gets for all this work she said 8hr, that is such a disgrace for someone to do all that work and on her own.   That's another reason why I stop shopping at JC Penney because I don't have to deal with looking at how they treat there sales-associates.    Also they need to get rid of managers which are a waste of time and give power to there sales-associates to bring the store back to it's feet.   JC Penney can pick up there sales fast but they need to start thinking out-side the box, like hype the marketing product, give sales-associates the power to bring in there ideas!   The customer depends on there sales-associates not on there supervisors or mangers!   
Aug 15, 2013 7:00PM
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Did anyone (besides me) notice that on the day the market crashed 275 points MSN ran two nunrelated stories (Buffet and JCP)?
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