J.C. Penney may go the way of Woolworth’s and other retail dinosaurs. It lost its once loyal customers in a bid to fix what wasn’t broken, and J.C. Penney’s tale of woe sheds light on the darker side of activist investing, as recounted by Retail Maven in a Seeking Alpha article.
J.C. Penney customers loved promotions and would run to the retailer for the best deals. Of course, in dollars and cents terms, promotions seem like a bad thing, because one is selling one’s merchandise at a lower cost, which could mean fewer profits. However, if those deal-loving customers jump ship when those promotions disappear, trying to unload inventory no one wants to buy is a bigger problem.
Pershing Square’s Bill Ackman tried to get J.C. Penney back on its feet, but ended up breaking its legs. He bought a stake in 2010, when shares went from $21 to $32 per share. He was joined by Steven Roth of Vornado Realty. They saw the share price rise to $42 by 2012, and like the guy who killed the goose that laid the golden egg, they wanted more.
It’s amazing, as Retail Maven notes, that Roth, with his knowledge of retail, allowed Ackman to disrupt the business model, but Ackman brought in Ron Johnson as CEO. Johnson might have been the genius behind Apple Stores, but he didn’t understand J.C. Penney customers. Johnson got rid of the promotions that customers loved in favor of “every day low prices” and customers voted with their feet, and they ran, not walked, away. Sales dropped 25% in 2012, and losses were at $1.39 billion annually compared to a $389 million profit when Ackman bought his stake. Ackman and Roth continued to stand behind Johnson throughout his sixteen months as CEO, before Myron Ullman was returned as chief executive officer.
While Larry Robbins of Glenview Capital management and George Soros shared Ackman’s vision at first, they bailed out by 2013, and Ackman was stuck with a $800 million loss in his initial investment. With retail as a fragile and competitive environment, it is hard to know if it can get its groove back. Even if it revs up the promotions again, its customers have already fled, and once customers adopt new habits, it is hard to get them back into old ones.