Just last week, Bill Ackman resigned from the board of directors of J.C. Penney Company, Inc. (NYSE:JCP), after several weeks of tense and arduous disagreement over the direction and leadership of the company. While Ackman, Penney’s largest shareholder, publicly stated that the move was “…the most constructive way forward for J.C. Penney Company, Inc. (NYSE:JCP) and all other parties involved,” his history as an activist investor likely played a role in the board’s decision to adopt a so-called shareholder’s rights plan. In short, this plan would make it essentially impossible for a new investor to establish a large position in the company in an attempt to take over and force change.
While on the surface this may sound good to current investors, it’s really not. Let’s talk about why.
Another bad quarter
The poison-pill announcement comes two days after the company reported that sales were down yet again. Now pay close attention to the language from the release (bold mine for emphasis):
J C Penney reported net sales of $2.66 billion compared to $3.02 billion in the fiscal second quarter of 2012. Comparable store sales declined 11.9% in the quarter, and were negatively affected by the Company’s failed prior merchandising and promotional strategies, which resulted in unusually high markdowns and clearance levels in the second quarter.
Don’t blame us. Blame Ron Johnson.
At least, that’s the message it looks like management is shouting. Johnson, the former CEO brought in from Apple in large part because of Ackman, was ousted in April, less than 18 months after taking the reins at the struggling retailer. And while there’s no evidence that the plan he was implementing was set for success or failure, it was the board’s decision to remove him as CEO–and scrap his marketing and merchandising strategy–that led to the latest quarter’s poor results.
Still losing business where it matters most
Web sales are now central to the success of retailers like J.C. Penney Company, Inc. (NYSE:JCP), which makes the continuing decline of its web business–a 2% drop last quarter–concerning, especially as traditional retailer competitors like Macy’s, Inc. (NYSE:M) grow stronger in their ability to fulfill web orders.
As of the end of 2012, customers could pick up a web order at 292 Macy’s, Inc. (NYSE:M) stores, or simply use free shipping. By the end of 2013, customers will have more than 500 stores to choose from to pick up an item. The company is also expanding its Goodyear, AZ distribution facility by 300,000 sq feet in order to more quickly fulfill web orders. While Macy’s, Inc. (NYSE:M) doesn’t break out web orders in its financial filings, it’s not a stretch to conclude that these investments are being made to foster and support growth in web sales.
While Macy’s, Inc. (NYSE:M) just-reported quarter shows that sales were flat, earnings per share continue to increase as the company aggressively buys back shares. Shares outstanding have been reduced by almost 9% since 2011. With another $2.2 billion authorized to buy back shares, this would return another 12% in equity to investors and save another $40 million in annual dividend payments.
J.C. Penney Company, Inc. (NYSE:JCP), on the other hand, is in essentially the same mess it was a few weeks ago, with no clear direction forward. Add in the poison pill, and all management and the board has done is indicate it’s willingness to defend itself, and not necessarily the best interests of the company. Because frankly, the first thing an investor with enough resources to take a large position would do is make changes on the board. And maybe a wholesale refresh is what’s needed.
