The talk of the investment world this past week has been the continuing soap opera at JC Penney. The latest installment has been the feud between board member and New York hedge fund manager Bill Ackman and just about everybody else within the company. Ackman, of course, was the one who convinced the board to hire former Apple retail guru Ron Johnson as CEO—a move that cost the company billions after Johnson disastrously tried to make the venerable retailer into some kind of glorified cross between Saks Fifth Avenue and Urban Outfitters.
After the company finally got rid of Johnson in May, Ackman agreed to bring back former CEO Mike Ullman on an interim basis. But that brief period of harmony vanished this week when Ackman publicly aired his displeasure with Ullman’s leadership. That move was the last straw for the board. They accepted Ackman’s resignation, calling his recent behavior “disruptive and counterproductive.”
Too which I say—”disruptive and counterproductive???” I know corporate boards tend to err on the side of decorum and blandness, but calling Bill Ackman “disruptive and counterproductive” to Penney’s is like calling an arsonist “disruptive and counterproductive” to buildings.
I shorted Penney’s seven months ago. It was a dead company walking then and I still believe it is a dead company walking today. And the person that mortally wounded it was the exact person who caused the latest trouble, Mr. Ackman himself. Ackman has been “disruptive and counterproductive” from day one at Penney’s, and even though he’s gone now, he’s left behind the torched shell of a once great company.
The popular press has had a field day with Penney’s upheavals. But I find the story quite sad, even tragic. Penney’s is one of America’s oldest retail institutions. Sam Walton said he learned the business from its founder. Not to mention, it employs thousands of ordinary Americans. And yet, in typical Wall Street fashion, Ackman and Johnson completely disregarded that legacy and tried to make Penney’s a place for coastal elites like them to shop. They eliminated discounting and coupons and put in glitzy brand name merchandise. They also, stupidly, made it difficult to pay with cash in the stores. In so doing, they alienated the company’s core working class customers, many of whom not only loved finding discounts and using coupons—even on no name brands—but had to pay with cash because they didn’t have credit cards or bank accounts.
Talk about “disruptive and counterproductive.” It’s hard to grow revenues when you decide to stop accepting your customers’ money.
And when I say Ackman and Johnson are coastal elites, I mean it quite literally. They treated Penney’s customers and employees like little more than fly-over country rubes. Throughout his 18 month tenure, Johnson refused to move to Dallas. He kept his mansion here in the Bay Area and flew into Dallas on the company’s private jet to stay in a suite at the Ritz Carlton. I don’t know who was more arrogant, Johnson for insisting on living thousands of miles from his job or Ackman for believing that such an arrangement was acceptable.
Penney’s first quarter sales were down over 16 percent, after dropping an astounding 25 percent last year. Wall Street is guessing that sales will only be down eight percent when it releases second quarter earnings on August 20th. I can’t tell the future, and I’m far from an expert when it comes to the highly volatile retail sector, but I will be quite surprised if they make that number.
Once you fire your customers, they don’t come back. Worse still, Penney’s is weighted down with debt and will pay almost $400 million in interest payments this year. The company recently admitted that it only has $1.5 billion in cash on hand. That might sound like a lot, but for a company of this size, it’s not nearly enough, especially as they ramp up for the all-important Christmas season.
The most important players in this drama are the company’s vendors. If they lose faith and stop extending credit to Penney’s, it’s game over—and that exact doomsday scenario could happen sooner than later. According to my analysis, if sales decline over 22 percent this fiscal year, bankruptcy is inevitable.