Activist investor William Ackman is no longer on the outside at J.C. Penney Co. Inc.
This story first appeared in the January 25, 2011 issue of WWD. Subscribe Today.
Penney’s said Ackman, chief executive officer of Pershing Square Capital Management, and Steven Roth, chairman of Vornado Realty Trust, will be joining its board in time for the Feb. 22 meeting, when directors will perform their annual review of the company’s capital structure. Ackman also won the right to nominate one more director, expanding the company’s board to 14.
The appointments are a victory for mild-mannered-but-determined Ackman, who, along with Vornado, owns more than 26 percent of Penney’s stock. It’s a win that Target Corp. denied Ackman in 2009, when the investor agitated to spin off the discounter’s real estate and spent $10 million in an unsuccessful attempt to shake up its board.
Penney’s also said it would close five underperforming department stores and one home store, while consolidating its furniture outlet business and trimming its call centers. The actions will lead to onetime charges totaling $50 million in the fourth quarter and upcoming fiscal year, but will add $25 million to $30 million to the bottom line beginning next year.
Investors approved and pushed shares of Penney’s up $2.18, or 7.2 percent, to $32.52 as the S&P Retail Index gained 1.67 points, or 0.3 percent, to land at 503.85. Bolstered by tech issues, the Dow Jones Industrial Average was up 108.68 points, or 0.9 percent, to 11,980.52, and hit a new 52-week high of 11,982.94 in midday trading.
“They made a very large investment,” Penney’s chairman and ceo Myron E. “Mike” Ullman 3rd, told WWD. “That aligns them with our interests. The tone of the conversation has been, ‘If we were inside the boardroom, we could be more helpful.’ Who wouldn’t want people of their accomplishment and their expertise to be employed alongside our other directors to look into the future? There was never an angry word.”
Ullman said he’s met with Ackman and Roth several times, once for a full day in mid-October, but they haven’t had in-depth discussions about the company’s real estate. Penney’s organized its owned stores into a real estate investment trust for tax purposes in 1999. Ullman did say the company has “a lot of work to do” following the worst recession in 80 years and that its privately sourced brands were in a position to gain against national brands as apparel prices rise across the industry.
Bringing Ackman into the fold is an about-face for Penney’s, which adopted a poison pill shareholder plan to protect it from a takeover shortly after the activist revealed his stake in October.
“It’s a great company,” Ackman said of Penney’s on CNBC’s “Squawk Box” Monday morning. “It’s a great brand. It’s been around a long time, but it has underperformed its peers, namely Kohl’s and some others, and I think it can be a better retailer.”
Ackman said he was attracted to Penney’s because the stock was “extremely cheap” and that he didn’t envision spinning off the company’s real estate, as he suggested at Target.
“This company will succeed or fail on the basis of how it does as a retailer. It helps that it has very valuable real estate assets and very low-cost real estate,” he said. “On the margins, there are assets here that are probably more valuable to another retailer than to J.C. Penney. There are some stores where J.C. Penney doesn’t do very well, but it happens to be [in] a phenomenal mall.”
Ackman also is betting on the future of the mall.
“There are some department store retailers that are doing phenomenally well,” he said. “Look at Forever 21.…They’re taking department store-size boxes now in malls and they’re a traffic generator, so I think of them as an anchor. You can sell women’s apparel and be very successful in the mall. One of the big lessons of the financial crisis is a lot of the more tertiary retail concepts, lifestyle centers, things like that — they failed. Traffic still stayed in the mall and they’re not going to build a lot more malls. The mall becomes a more dominant asset over time.”
Carol Levenson, director of research at Gimme Credit, said the cost-saving plan didn’t feel like the other shoe dropping, but perhaps the other flip-flop, in the dance between Penney’s and Ackman.
“We’re somewhat surprised that the activist investors — despite their substantial stakes — were added to the board without a proxy fight or any public disclosure of their intentions or plans,” Levenson said. “This keeps things very gentlemanly, but less transparent.”