Big Investors Could Mean Big Changes for Penney

Oct 11, 2010

By George Anderson

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.

The latest headline-grabbing investment made by Mr.
Ackman is his 16.5 percent stake in J.C. Penney. That makes him the largest
holder of Penney stock. A filing by Pershing Square said it made the investment
in the department store chain in consultation with Vornado Realty Trust, which
owns 9.9 percent of Penney.

The combined clout of Mr. Ackman and Vornado’s Steve
Roth is expected to put increased pressure on Penney chief Myron "Mike" Ullman.
The chain has lagged competitors such as Kohl’s and Macy’s and its stock has
only recently begun to rebound.

Allen Questrom, the former CEO of Penney, told The
Wall Street Journal
, "Out
of the leading department stores, Penney comes in dead last. So from my vantage
point, Ackman’s [involvement] is not bad. Clearly, J.C. Penney needs to improve
its performance."

One area where Mr. Ackman may seek to realize value is
through Penney’s real estate holdings. The company operates over 1,100 stores
and owns over 400. In 2008, Mr. Ackman tried to convince Target management
to spin off its real estate holdings to become part of a real estate investment
trust called Target Inflation Protected REIT (TIP REIT). At the time, Mr. Ackman
argued TIP REIT would increase Target’s value by roughly $30 a share.

"There is a lot of real estate and historically he’s been a
real estate-focused activist," Leah Hartman, senior vice president and
retail analyst at CRT Capital Group, told Bloomberg News. "It
certainly is a company that we see value in."

Ms. Hartman also thought
Penney would be wise to use its cash to pay down debt.

Discussion Questions: Do you see the investment in J.C. Penney by Pershing
Square Capital Management and Vornado as a positive or negative development for
the future direction of the department store chain? What do you expect to happen?

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9 Comments on "Big Investors Could Mean Big Changes for Penney"

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Paula Rosenblum
11 years 7 months ago

Just what our industry needs…another real estate guy making decisions about retail operations.

The damage will probably be minimal since the board rarely gets involved in actually running the company’s operations.

What’s the old mantra? “Retail’s different.”

Gene Hoffman
Gene Hoffman
11 years 7 months ago

We are experiencing an era where traditional retailing processes are being blended with new ingredients. That has revealed “that there are new ways to skin a cat” and they can also kill the cat.

What is the real reason for J. C. Penney to be in business–to serve customers better than anyone else could serve them or to make more money for the stockholders, particularly the new breed? An optimum J.C. Penney must do both thoughtfully.

Let’s hope that whatever happens next won’t make old retailer J.C. Penney turn over in his grave.

Roger Saunders
11 years 7 months ago

If Ackman moves beyond just a real estate play, and adds counsel to Marketing/Merchandising that focuses on the consumer, both existing and new, he’ll have a major impact–largely for the positive.

Penney’s sales are an indication that their strategies have not resonated with expanding their consumer base. And, based on the 90 Day outlook of JC Penney shoppers, that existing base, which is a bit older, better educated, and slightly more affluent than the general population, is NOT planning on spending more on the key categories that are available at Penney stores.

They have to listen to those consumers, or they are going to find themselves listening to a couple of very large shareholders, who have put their money where their mouth is.

Bill Emerson
Bill Emerson
11 years 7 months ago

As Yogi would say – this is deja vu all over again. Does the name Ed Lampert ring any bells? That worked out well, don’t you think?

Ed Rosenbaum
11 years 7 months ago

Big changes for Penney’s? OK, so what? Have we heard this old song before? If Mr. Ackman keeps his focus on the real estate side of Penney’s with the target to increase the profitability, that I see as a positive. If he chooses to flex his financial muscle on the retail side then “Houston, we (may) have a problem.”

Marge Laney
11 years 7 months ago

I agree with Bill. And, the stock has already gained big time since the announcement. Seems to be a classic value investment; go with the unloved in the sector.

Doug Stephens
Doug Stephens
11 years 7 months ago

I’ve believed for some time that the only strategic option for a brand like Penney is to leverage the one and only thing they do have left…locations.

And within that, the only salvation will be amalgamate young, fashionable and in some cases fledgling brands within the space, in an effort to curate a unique and interesting shopping experience. Sephora was a step in the right direction but they need take the strategy all the way. Every square foot of a J.C. Penney should be licensed out to brands that can bring excitement, fashion, and a cool-factor.

They need to risk losing their old core consumer in an effort to attract new and decidedly younger ones.

Penney means nothing to anyone under 30 and unless that changes, it doesn’t matter much who’s at the helm.

Brian Kelly
11 years 7 months ago

Mr Ackman,
Welcome to retail.
We wish you the best of luck.
We are sure you are no wimp amongst your fellow investors.
But be careful where you tread because once you cross the threshold, all that glitters is not necessarily gold.
Or as we like to say, “retail ain’t for sissies.”

Ted Hurlbut
Ted Hurlbut
11 years 7 months ago

Ackman clearly is a real estate guy, and in both Target and Penney’s he’s clearly attracted to what he sees as undervalued real estate.

I’m not a real estate guy, but what I don’t understand is how all of this real estate could be so undervalued with commercial real estate, and mall property in particular, being what it is today?


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