The Street Gives Up On J.C. Penney

A bad quarter sends investors fleeing, and the shares plummet | Ackman stands behind “America’s favorite store”

Sapna Maheshwari

Hedge fund manager Bill Ackman is looking increasingly isolated in his bet on retailer J.C. Penney. The 110-year-old company just completed the first year of a transformation led by former Apple retail chief Ron Johnson, and the results were disastrous: Sales slid by 25 percent to $13 billion and $4.3 billion in revenue evaporated, resulting in a net loss of $985 million, the worst in more than two decades. The shares lost more than half their value in the past year, and cash is dwindling — not the outcome anyone expected from the wunderkind who helped Steve Jobs create the world’s most profitable stores and, before that, developed Target’s cheap-chic style.

Ackman, whose Pershing Square Capital Management is the company’s biggest stockholder, with about 18 percent of the shares, still trumpets Johnson as a genius who will ultimately turn J.C. Penney into what he calls “America’s favorite store.” So far, Pershing Square has lost $606.5 million on its investment, according to data compiled by Bloomberg.

Other investors are bailing. In early March, Vornado Realty Trust, whose chairman Steven Roth is on J.C. Penney’s board, sold almost half of its stake in the company after losing more than $200 million on the investment last year. Vornado was J.C. Penney’s second-biggest shareholder. Hedge funds including Eminence Capital and Maverick Capital disposed of sizable stakes in the company during the fourth quarter.

The stock lost another supporter on March 6, when Citigroup analyst Deborah Weinswig changed her recommendation to neutral from buy, saying that after a meeting with executives including Johnson, she’s more concerned about how long it will take to return to sales growth. J.C. Penney is now the second-most heavily shorted stock in the Standard & Poor’s 500-stock index, after GameStop. (Short-sellers are betting that the price will drop.)

Even investors who are hanging on have doubts. “The way I’ve been describing it to my investors is, ‘I’m either committed to owning it for the long term, or I should be committed,’” says Steven Kiel, the founder of Arquitos Capital Management, which holds J.C. Penney shares. “Those people who are interested in the short term are shorting the stock or want Johnson out, but those looking at it from the long-term perspective are looking to see what this transformation could bring, which could be multiples of the current share price.” On March 5, the day the Dow Jones industrial average closed at a record high, J.C. Penney’s shares fell to $14.96, a four-year low. Analysts’ price targets on the stock for the next 12 to 18 months range from $10 at Maxim Group to $25 at Argus Research.

Ackman, a member of J.C. Penney’s board, helped recruit Johnson in 2011, saying at the time it was a “credit” to the company that it could obtain such an executive to turn around its operations. In January of last year, Johnson laid out a four-year plan for revamping the re-tailer, saying the company would change its “brand, corporate identity, and create a whole new personality.”

Instead, customers were turned off by his plan to remove coupons and promotions in favor of a “fair and square” everyday low-pricing strategy. Since then, Johnson has added promotions back into the mix. His sup-porters are betting that the other linchpin of his strategy will have more success: turning most of the company’s stores into collections of 100 shops-within-the-store. Last year, Johnson rolled out eight of the boutiques, which he said post higher sales per square foot than other parts of the store. He says about 30 percent of the shops will be complete at the end of May. Johnson and the company declined to comment.

This month, J.C. Penney will introduce a boutique with Canadian retailer Joe Fresh that Johnson says will attract new buyers. “If Joe Fresh doesn’t work, this could be the worst ides of March since Brutus greeted Caesar on the floor of the Senate,” says Rick Snyder, an analyst at Maxim, who has a sell rating on the shares. Joe Fresh “is kind of a microcosm of what they’re trying to do, and if it doesn’t work, I think it’s going to get really ugly.”

The bottom line After J.C. Penney posted a loss of $985 million for 2012, shares fell below $15 to a four-year low.


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