A Blog by Jonathan Low


Aug 20, 2013

JCPenney, The Reality Show

So what is it about billionaire hedge fund guys that makes them think the retail business is desperate for their brand of leadership? I shop (or I have a personal shopper), or I used to love shopping with my mom, therefore I know everything I need to know to make a killing in this industry? 

Or is it just about the underlying real estate? I can't lose, I'll just sell the locations when I get bored and still come out ahead.

Whatever. First Edward Lambert bought Sears and KMart, then combined them thinking that he would show the business world how to turns the proverbial pig's ear into a silk purse. Twice. What he has received instead is a refresher course in grade school arithmetic: two negatives do not add up to a positive.

He has now been eclipsed by William Ackman, another financial wizard. Ackman's fund bought into JCPenney, the moribund American middle market retailer. His idea was to bring in Ron Johnson, the guy credited with making Apple stores the phenomenon they are. But when someone tells you that selling $600 iPhones is not the same as selling six pairs of socks for $7, you should probably listen. Johnson's strategic reconceptualization of Penney was such a disaster that rather than turning the company around, sales dropped 25 percent in one year.

Johnson was summarily dismissed and the old CEO brought back as a temporary fix -with Ackman's approval. After three months, however Ackman, decided that was enough and attacked the board for not moving fast enough. He was excoriated in the press, assaulted by fellow board members and then resigned from the board in a huff and announced plans to sell his stake, now $700 million in the red.

As if this comedy of bloated egos was not enough, Penney's and Macy's went to court over the sale of Martha Stewart products after she negotiated simultaneous, overlapping 'exclusive' arrangements with both. She probably longs for the contemplative solitude of her old jail cell.

There are numerous lessons to be learned from this charade, but the overarching message is one of financial dominance overawing good governance. The people who engineered these debacles are smart. They were educated at America's finest schools like Harvard, Yale and Harvard Business School. They have access to phenomenal amounts of money due to funds they have raised from savvy investors which they are free to invest as they see fit. And yet they failed.

Financialization has subjected the economy to the whims of those with the power to manipulate, but not necessarily the skill or experience. The determined assault on strong governance strictures and tighter regulation has contributed to the impact of these sorts of shenanigans. We may laugh at their hijinks from the safety of our offices, but thousands lost their jobs, pensions, health insurance and savings as a result. That is the price this society and economy pays for indulging this behavior. JL

Jennifer Reingold reports in CNN/Money:

You've seen them on Big Brother, The Real Housewives, and The Bachelorette: the walking disasters and oversimplified personas that make a show both repellent and fascinating at the same time. And now you see them in the last place you'd expect -- at the lurid reality show that is J.C. Penney (JCP). Thanks to a motley cast of characters, the $13-billion-in sales middle-brow department store has become a real-time tableau for virtually everything that's wrong with American business.
On Tuesday at 8:30 a.m. EDT, the company will release its second-quarter 2013 earnings numbers. Although hotly anticipated by every business journalist, hedgie, and retailer out there, it doesn't much matter, whether they are outrageously disappointing or not quite as disappointing as anticipated (decent earnings are not an option); JCP is in deep trouble and everyone knows it.
More significant is how a few colorful characters took a 111-year old company whose name was once a virtual synonym for boring and turned it into the kind of train wreck you simply can't stop watching.

Here, then, in the spirit of it being better to laugh than cry, is a handy guide to the main characters in the tragedy that is J.C. Penney.
The Know-It-All: Bill Ackman
Ackman, the always-confident head of Pershing Square Capital Management, started this whole enchilada when he, along with real estate executive Steven Roth, bought more than a third of the sleepy company in 2011 and pressured the board to replace CEO Mike Ullman with Ron Johnson, the brain behind Apple's (AAPL) retail effort. When Johnson didn't deliver the results he had promised, Ackman canned him, then -- later -- started a nasty public fight with the board, impugned their qualifications and -- on August 13 -- stepped down, some $700 million in the hole. It can't feel good that some of his rivals, like George Soros, have bought in at close to JCP's low, seemingly as much to taunt Ackman as anything else.
The Disruptor: Ron Johnson
What's more exciting than a fearless leader who damns the torpedoes? Forget about things like focus groups and surveys; Johnson, who started Apple's retail arm under another famous disruptor, Steve Jobs, claimed to know exactly what the customer wanted: the end of sales and discounts.
Except that they didn't.

Sales dropped an astonishing 25% in a year. Although Johnson hoped to remake J.C. Penney as an exciting destination -- "America's favorite store," with a town square in the middle of a strip mall -- plummeting sales got him canned in April, just as some of his new products and formats were finally rolling out. At least no one can ever accuse Johnson of being an empty suit.
The Celebrity: Martha Stewart
Where Martha goes, drama follows. This maxim held true yet again when she signed an agreement to sell 16.6% of her company to J.C. Penney and produce a new line of housewares for the company. There was one major problem, however: Macy's (M), which sold her current line, wasn't amused. The lawsuit that followed -- which is still unresolved -- slowed Penney's momentum at a critical time and left shelves empty. What's more, Martha Stewart Living Omnimedia continues to suffer, with its stock down 40% since the Penney deal was announced, creating a double whammy for JCP and its investment. Martha, however, continues to get paid for her products, whether or not they sell.
The Phoenix: Myron "Mike" Ullman
Until 2011, Ullman was regarded as a decent, if not scintillating, retail executive. J.C. Penney made money, but no one thought of the company as anything but dowdy. When Ackman blew into town, he set his sights on Ullman, who first planned to stay on as chairman, then changed his mind (encouraged, of course, by a hefty severance package). Just 17 months later, he was back; in April 2013, the board ousted Johnson and reinstated Ullman, who was supposed to be a temporary salve but has managed to stay in charge after yet another attack from Ackman, in August 2013. He's the Susan Lucci of retail executives.
The Greek Chorus: J.C. Penney's Board of Directors
Chaired by former Texas Instruments CEO Thomas Engibous, the 11-member board acted collectively like a small, scared kitten when Ackman and Steven Roth, CEO of Vornado, bought in and agitated for change, starting with the hiring of Johnson. Said one director, smiling nervously at the time of Johnson's star-studded relaunch of the company in early 2012: "He [Ackman] seems like a smart young man. I sure hope this works out."
It didn't. Or, at least, it hadn't when the board reversed course, canning Johnson after Ackman lost faith and Roth abruptly sold his stake in the spring of 2013. Only in August 2013, when Ackman publicly dissed the board and called for yet another CEO, did the directors finally decide they'd had enough. They figured it was better to have him sell his stake than to remain part of the company's leadership. But the damage was done.
J.C. Penney's survival is now officially in question, with the stock trading at about $13, down from its 2012 high in the low 40s. What would The Situation say?


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