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J.C. Penney’s Post-Johnson Options Seen to Include Sale

*from, April 9, 2013 (To view original article click here.)

Take Away #1: J.C. Penney yesterday ousted CEO Ron Johnson.

Key Facts and Figures:

  • J.C. Penney made a radical break from tradition in the first place by the high-profile hiring Silicon Valley wunderkind Ron Johnson as CEO.
  • J.C. Penney ousted Johnson after suffering a 25% annual sales decline.
  • Johnson has been replaced with his predecessor, Myron Ullman III.
  • Investors pushed the company’s shares up 13% on news that Johnson was out, but abruptly sold after learning Ullman was the new CEO.
  • J.C. Penney dropped 9.3% to $14.40 at 9:45 a.m. in New York.

Take Away #2: With Johnson gone, the chain may have to pursue even more radical options, such as selling itself.

Key Facts and Figures:

  • Johnson had pursued a strategy of turning the chain into a collection of boutiques.
  • Ullman will have to decide whether to continue Johnson’s strategy or return to a more traditional department-store model.
  • Ullman will also have to consider whether to sell the company or break it up, said Dave Larcker, professor at the Stanford Graduate School of Business.
  • “The board is going to have to get much more involved in the strategy of the company,” Larcker said.

Take Away #3: The Plano, Texas-based chain was so damaged under Johnson that Ullman will struggle to turn it around.

Key Facts and Figures:

  • On Feb. 27, J.C. Penney reported annual revenue dropped to $13 billion, the lowest since at least 1987.
  • Johnson alienated the company’s core customers by doing away with sales and promotions.
  • Johnson only recently began trying to win them back by putting discounts front and center again.
  • “There is a tremendous amount of cleaning up and rebuilding that has to take place,” said Howard Gross of executive search firm Boyden.

Take Away #4: Johnson’s appointment as CEO in November 2011 was greeted with much anticipation by analysts and investors.

Key Facts and Figures:

  • Johnson had helped Steve Jobs prove doubters wrong by turning Apple Inc.’s stores into a success with unrivaled sales per square foot.
  • Johnson was expected to work similar feats at J.C. Penney, which struggled for relevance.
  • The shares surged 17% on June 14, 2011, the day Johnson’s hiring was announced, for the biggest gain in more than a decade.
  • Bill Ackman, whose Pershing Square Capital Management LP is the company’s largest investor, handpicked Johnson and championed his re-invention plan.
  • Before Johnson unveiled his turnaround strategy in January 2012, Ackman vowed it would be the most important day for retailing in 25 years.
  • At first investors were on board and the shares surged whenever Johnson spoke publicly.

Take Away #5: Johnson made a series of splashy announcements but had little success.

Key Facts and Figures:

  • One of Johnson’s first announcements was that J.C. Penney was taking a 17% stake in Martha Stewart Living Omnimedia Inc. with the aim of selling the lifestyle doyenne’s products.
  • The bet later soured when Macy’s Inc. which already had an exclusive deal to sell Martha Stewart-branded merchandise, sued J.C. Penney.
  • The two continued to battle in a New York court yesterday.
  • Another move that would come back to bite Johnson was the decision to institute everyday low prices and get rid of discounts and promotions.
  • A series of TV commercials, some starring Ellen Degeneres, sold J.C. Penney as a hip destination rather than focusing on specific merchandise and deals.

Take Away #6: Johnson’s strategy of eliminating promotions was doomed from the start, said Allen Questrom, a former J.C. Penney CEO.

Key Facts and Figures:

  • “I would have told him, ‘You can’t take a middle-market store in the middle of a recession and not have sales,’” Questrom said.
  • “It’s never worked before. If you want to do that, you have to do it over a long period of time and certainly not in a recession, when people want more value than ever,” said Questrom.

Take Away #7: Johnson’s failure is a blow for Ackman, who is now accepting Ullman as CEO.

Key Facts and Figures:

  • Ackman helped push out Ullman in 2011.
  • Ackman first disclosed his J.C. Penney stake in October 2010, when his $13 billion hedge-fund firm filed documents showing that it held 16.5% stake in the retailer.
  • Vornado Realty Trust, a real estate investment trust run by Steven Roth simultaneously disclosed that it had acquired a 9.9% stake in J.C. Penney.
  • Roth has teamed up with Ackman in the past.
  • Ackman spent more than $1 billion to acquire 39 million common shares at an average cost of about $25.90 each.
  • Pershing Square later raised its economic stake by entering into swap contracts on an additional 15.9 million J.C. Penney shares.
  • The contracts would require the hedge fund to pay out cash to the extent the retailer’s stock price fell below $26.14.
  • Based on yesterday’s closing share price, Pershing Square has a loss on its J.C. Penney shares of about $390 million, or 39%.
  • It also has a partially realized loss of $164 million on the total return swaps it holds.

Take Away #8: Ackman’s best shot at salvaging the investment may be to push the department store to go private.

Key Facts and Figures:

  • Going private may require additional capital.
  • J.C. Penney is now trading at a 73% discount to its annual revenue, the second-cheapest among U.S. department store chains.
  • J.C. Penney also has the industry’s highest ration of net debt to market value, making a traditional leveraged buyout unlikely.
  • Another option may be to place some properties into a real estate investment trust.
  • J.C. Penney’s setbacks have left its equity priced at 27 cents for each dollar of revenue, a valuation that lags behind Macy’s, Nordstrom Inc., Kohl’s Corp., Dillard’s Inc. and Saks Inc.
  • Last week Ackman abruptly stopped defending Johnson, saying that Johnson had made changes too quickly and called the turnaround “close to a disaster.”

Take Away #9: Now it is up to Ullman to stabilize the company.

Key Facts and Figures:

  • In Ullman’s previous stint as the CEO from 2004 to 2011, he breathed life into the chain with new brands such as Sephora and Liz Claiborne.
  • Sales grew in 2005 and 2006, and the shares more than doubled through February of 2007.
  • Then came the downturn and a corresponding slide in sales.
  • Ackman began pushing for changes in 2010.

*To view original article from click here.

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