New Board Directors Could Shake Up J.C. Penney

Jan 25, 2011
George Anderson

Back in October, we wrote, "William Ackman isn’t the
type of investor to put a lot of money into a company and let management continue
to do its thing. The manager of the Pershing Square Capital Management hedge
fund is known for putting dollars into companies that he believes are undervalued
and then actively pushing for changes to increase value."

True to form,
Mr. Ackman, whose fund owns 16.5 percent of J.C. Penney, was announced yesterday
as one of the department store’s new nominees to its board. Joining Mr. Ackman
among the nominees to the Penney board was Steven Roth, chairman of Vornado
Realty Trust, which owns roughly 10 percent of the department store chain.
Both are expected to win election to Penney’s board in February.

Myron (Mike)
Ullman, chairman and chief executive officer of J.C. Penney, said in a statement, "We
welcome Bill and Steve to the board. They share our passion for operational
excellence and are committed to enhancing value for all of the company’s
shareholders. We look forward to benefitting from their expertise."

their combined share in Penney was made public, speculation has been that Messrs.
Ackman and Roth would make some sort of real estate play, perhaps spinning
of the chain’s holdings as a separate real estate investment trust
(REIT). Mr. Ackman tried unsuccessfully to get Target to pursue this strategy
in 2008 and 2009.

Leah Hartman, senior vice president at CRT Capital Group,
told The Dallas
Morning News
that she expects the new board members to help Penney to "find
ways to unlock additional value" from its real estate.

Mr. Ullman doesn’t
think he and the new board members will be overly transfixed on the company’s
real estate. As a Wall Street Journal report points
out, the chain created a REIT back in 1999 for tax purposes. Today, the REIT
owns about 38 perdent of the company’s real estate assets.

Penney’s CEO told the Journal,
that he did not anticipate spending a lot of time with the new members discussing
real estate.

The company also announced yesterday that it was closing several
stores as well as "winding down" its catalog business.

"The actions we are announcing today are significant steps in an ongoing
process to ensure we are best managing costs and allocating our resources effectively
to the strategies that will allow us to improve margins and drive profitable
sales over the long term," said Mr. Ullman in a statement. "We see
significant opportunities ahead in our core department store and online businesses
as part of our Long Range Plan and we are well prepared to capitalize on them
in 2011 and the years to come."

Discussion Question: What do you think the addition of William Ackman and Steven Roth to the J.C. Penney board of directors will mean for the company? What advice would you give the board for Penneys at this time?

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9 Comments on "New Board Directors Could Shake Up J.C. Penney"

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Bill Emerson
Bill Emerson
10 years 3 months ago

This is eerily reminiscent of Sear’s recent history. That didn’t work out too well (to say the least). Retailing success is about merchandise and customer experience, not clever real estate and financial plays. While everybody at JCP is putting on a happy face, I can’t imagine there is much joy there today.

Dan Berthiaume
Dan Berthiaume
10 years 3 months ago

JCPenney is getting pretty badly squeezed by Kohl’s on one side and Walmart/Target on the other. Traditional department stores like JCPenney, Kmart, and Sears really need to figure out a way to stay relevant in the current landscape, where the need for a middle layer between Macy’s and Walmart is evaporating (and Kohl’s is dominating what’s left of the space). I’d advise the new board to examine everything, including untapped potential of mobile and social networking technologies as well as possible changes to their merchandising and pricing strategies.

Gene Hoffman
Gene Hoffman
10 years 3 months ago

When two aggressive non-retailing dudes seek to enter and influence retailing strategy there is always a “reason.” That “reason” might be to benefit retailing or enhance the new dudes’ objectives and portfolios.

Nonetheless, if the current mindset at J.C. Penney brought order, perhaps the expected new chaos will breed dynamic new life. But only a future jury can decide if that’s true. At this juncture one wonders if the initials A.R. replace J.C. in Penney’s future and on its existing real estate….

Gene Detroyer
10 years 3 months ago

The real question is, “Without real estate, what is Penney’s worth?” Once you take the asset value of the real estate out, does the department store on a stand alone basis have a positive value? My guess it doesn’t.

This is a real estate play to be supported by the cash flow of Penney’s until more valuable uses for the real estate can be realized. From the retail side we will see more store-in-a-store development and less direct Penney’s operation. This is likely the only reason for being for this retailer.

Brian Kelly
10 years 3 months ago

I think it depends upon how one defines “company.”

For the shareholder, the short-term effect looks great as share price has risen. The promise of return on investment encourages the street. As mentioned, just like Sears.

But what will JCP become as a retailer? Understanding and managing the delicate balance of retail brands is not the core strength of hedge fund managers.

Whatever they do, I hope they do it quickly and decisively. Or they too will learn, “retail ain’t for sissies.”

Carol Spieckerman
10 years 3 months ago

The comparisons to Sears are inevitable but I have a different take on the results of non-merchants having a bigger say. Eddie Lampert certainly wields a bigger stick at Sears than Ackman and Roth ever will at Penney’s; however, since he took over, Sears has launched cutting-edge crowdsourced content and brand engagement concepts (Kenmore Live Studio and Craftsman Experience), multi-channel platforms (MyGofer, expansion of its online Marketplace), brand monetization and proliferation models (Craftsman at Ace) – oh yeah, and now they’re back on with strategic brand alliances and/or acquisitions (French Connection, NEXT and Kardashians). Contrast that with merchant-driven J.C. Penney, a sea of middling and undifferentiated brands, its online stronghold weakening from neglect and multi-channel integration non-existent, once powerful private brands atrophied and drowned out (did I mention the sea of brands?). Whenever J.C. Penney’s numbers get better, I always wonder how much better they could be.

Roger Saunders
10 years 3 months ago

Roth and Ackerman might bring a deeply needed perspective to J.C. Penney — that of listening to the expectations of the consumer. Penney has been squeezed over the past two years by department store brethren at various levels — Nordstrom, Macy’s, Kohl’s, etc, and by mass and specialty merchants like Target, TJ Max, etc.

Hearing the hoofs that were coming, Penney made solid adjustments in the 4th Quarter of last year at the store level to take care of customers. Stay that course and this could be much more than a real estate play on the part of the hedge fund crowd.

Roth and Ackerman have “skin in the game” here, with 27% of the stock. That’s serious money. These guys will likely be looking at a lot more than a real estate portfolio — they want to know how the consumer values Penney vis-a-vis their varied competitors.

Craig Sundstrom
10 years 3 months ago

While I admire Carol’s contrarian position, I can’t join her; I too see here a sequel to Sears: more busybodies seeking to prove everyone wrong, and seemingly proving them all too right instead. With Sears widely seen on life support, will JCP eventually join them, and leave the country with exactly one national department store brand? Terry Lundgren must be doing handstands right now.

Ed Rosenbaum
10 years 3 months ago

Maybe the first thing JCP needs to decide is where they stand in the Department Store business. Are they competing with Walmart, Target and Kohl’s? Or are they in the league with Macy’s and Sears? Either way, once they decide who they are; they will know how to be more successful pursuing the shopping dollar.


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