By and  on August 13, 2013

Financial questions remain, but at least the distraction is gone.

William Ackman has left the board of J.C. Penney Co. Inc., and while the public squabble is over, the retailer still has the same key problems as before: lackluster sales, the need to stabilize its financial situation and the question of when it finds a new chief executive officer.

All the remaining uncertainty is likely reflected in the 3.7 percent decline in Penney’s stock price Tuesday to $12.68, despite Ackman’s departure from the board and the appearance of a truce in his battle with other Penney’s directors.

Penney’s on Tuesday further strengthened its board’s retail expertise with the addition as a director of Ronald Tysoe, former vice chairman of Federated Department Stores, Inc. (now Macy’s Inc.) Penney’s said it plans to add another director in due course.

In revealing Ackman’s resignation as a director, Penney’s board gave unstinting support to its ceo Myron “Mike” Ullman 3rd and his strategy for the retailer.

“The board today also reaffirmed its overwhelming support for chief executive officer Myron E. (Mike) Ullman, III and for chairman Thomas Engibous, both of whom have been working tirelessly to position the company for future success. This important work has included stabilizing the company’s operations and financial position, restoring confidence among vendors, and taking steps to get customers back into stores,” Penney’s said.

But even with Ackman on the sidelines for now, Ullman faces the same uphill battle he faced before. The retailer’s second-quarter results are set to be posted on Aug. 20, a make-or-break report that could impact decisions by credit analysts, factors and other lenders on whether to approve orders for future shipments.

When Ackman’s ceo of choice, Ron Johnson, left the retailer in April, his failed turnaround supported by Ackman left Penney’s with a $1 billion loss and a 25 percent decline in sales. Ullman returned to the Penney’s fold — he also was Johnson’s predecessor — in April, but probably won’t have any significant impact on merchandising strategies until the holiday season. Sources said he has been able to make some changes in time for back-to-school, but these are more along the lines of stemming the financial leak and less on inventory and merchandising trends.

Ackman of Pershing Square Capital Management said Tuesday, “During my time on the J.C. Penney board of directors, I have always advocated for what I believe to be in the best interests of the company — its stockholders, employees and others. At this time, I believe that the addition of two new directors and my stepping down from the board is the most constructive way forward for J.C. Penney and all other parties involved."

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Despite the heated nature of the high-profile conflict, one source close to the situation said the drama was very civil behind the scenes, with no signs of acrimony or threats to push Ackman off the board. Ackman is said to have laid out his views to other board members and then simply informed them that he was resigning.

He controls 17.7 percent of Penney’s stock and is believed to be barred from selling shares to another investor who as a result would own 10 percent or more of the company, although details of such a restriction could not be learned.

Another source said Ackman wanted to “end the media circus” that he sparked and that “he can in some ways have more influence off the board. He can wage a proxy fight. He’s looking at his options [and is] a bit of a wounded animal right now.”

With Ackman out of the boardroom, Penney’s reiterated its focus on the “important work of stabilizing and rejuvenating the business.”

Tysoe isn’t expected to bring any new drama to the scene. The insider said, “Ron Tysoe was going to be announced as a director this week irrespective of Bill Ackman stepping down.”

According to Walter Loeb of Loeb Associates and a former retail analyst, Tysoe in the late Nineties was responsible for helping Federated exit bankruptcy proceedings and avoid a takeover by Canadian real estate honcho Robert Campeau.

Allen Questrom, whom Ackman and later Richard Perry of Perry Capital supported to become the next chairman of Penney’s, is also a former ceo of Penney’s and Federated. Questrom didn’t return a phone call seeking comment Tuesday. Questrom and Tysoe worked together at Federated, and Ullman would likely know Tysoe from Federated’s takeover of R.H. Macy.

Questrom told CNBC on Tuesday, “Ackman did what was right for the board.” He said that Tysoe will be good for the Penney’s board. “He’s a very strong financial executive. The company needs to get the business back on track,” said Questrom.

He added that Penney’s needs to get more equity into the business “sooner rather than later,” and if the board is happy with Ullman, they should get behind him. Questrom said that he was really not interested in coming back to the board of directors, but would consider it if he was asked by the board, and he agreed with their ceo choice.

As for Ackman, one of the questions that remains is whether he intends to keep his Penney’s stake. As a board member, Ackman had access to inside information. That wouldn’t prevent him from selling shares, but he would be able to do so only within certain time periods.

In an interview with CNBC Tuesday, Ackman indicated that he did not plan to sell his shares.

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He would take a huge loss if he did. His share purchases ranged in price from $20 to $29, with the midrange at $24.50. Tuesday’s close of $12.68 is a 48.2 percent drop from the average purchase price of $24.50.

Paul Trussell, analyst at Deutsche Bank, noted that Ackman leaving a board seat is “not always indicative of impending share sales, as was the case with [General Growth Properties] in 2010, where Pershing Square remains the number-two shareholder today. At Target, where he was denied a board seat, [he] held his shares for over a year, selling his stake roughly 18 months later.”

And once Ackman’s has had his say, he tends to stay under the radar for a bit of time.

Shortly after investing in Procter & Gamble Co. in July 2012, Ackman hit the airways to loudly criticize the company’s then-ceo Bob McDonald, saying the company had stumbled under his leadership and calling P&G a “very fat and bloated company.” At the time of Ackman’s initial investment, Wall Street analysts said his focus on P&G would put a sense of urgency to the board to make the changes needed to regain market share.

Whether any credit lies with Ackman or not, P&G abruptly replaced McDonald, who had served as ceo since July 2009, with his predecessor A.G. Lafley in May. Investors welcomed the change. The company’s stock price now hovers in the low $80 range, up from just more than $60 in July 2012 on the New York Stock Exchange.

As for what impact he may have on P&G’s board in the future, financial observers expect it to be minimal for the time being, particularly as Lafley is well equipped to fend off unwanted criticism or input. Ackman’s fund now controls 27.9 million shares of P&G, or 1 percent of the company.

So far the reaction on Wall Street to the turn of events was mixed.

Deborah Weinswig, broadlines analyst at Citi, said the resignation raises “more questions than answers.” She noted that Penney’s might need to hire a new ceo around yearend and said that if Ackman remains a shareholder, he could “drum up support from fellow shareholders and potentially wage a proxy fight.” According to Weinswig, Pershing Square’s direct voting power is limited to 15 percent, and its shareholder agreement with Penney’s allows it to designate one member to the Penney’s board. She also said that the agreement bars Pershing Square from “purchasing shares of common stock and derivative securities in excess of 26.1 percent of the outstanding shares of the company.”

Deutsche Bank’s Trussell said, “Positively, the focus of the board can now return to strengthening the operations and financing of the company, with the search process for a ceo now receiving a boost, as few retail executives were likely interested in working with Ackman as a sitting member of the board.”

He expressed caution, however, regarding Penney’s financial situation, saying that the “cash burn rate still remains high, with additional financing likely needed by [the first quarter of 2014] in order for vendors to accept orders for back-to-school and holiday 2014.”

Charles Grom, analyst at Sterne Agee, said, “We believe today’s quick and decisive announcement from J.C. Penney regarding its board situation is a net positive.…Reading between the lines, the board’s strong support for Ullman implicitly suggests to us that J.C. Penney is on the road to recovery, which is an encouraging development.”

Grom did note that Ackman’s push for a new ceo was a valid point since the company “needs to hire talented executives in a number of c-suite positions. Said differently, it is imperative that JCP deepen/solidify its bench across all facets of its business — finance, merchandise, e-commerce and IT — and it will be hard for potential hires to make the move to JCP until a permanent ceo is named.”

Loeb of Loeb Associates had a short list of candidates for the open post of president at Penney’s: Stephen I. Sadove, Marty Wikstrom, Christine Day and Roger Farah. He noted that many might not want to move to Plano, Tex., where Penney’s is headquartered. Several of them — particularly Farah — might find it difficult to take the job because of noncompete clauses.

Other names that surfaced from observers of potential ceo candidates are Ken Hicks, chairman, president and ceo of Footlocker; Matthew Rubel, former chairman, ceo and president of Collective Brands and now a senior adviser at TPG Capital; Ronald Boire, executive vice president, chief merchandising officer and president for the Sears and Kmart formats; Gregg Steinhafel, chairman, ceo and president of Target; John Fleming, former executive vice president and chief merchandising officer at Wal-Mart; Michael R. MacDonald, ceo and president of DSW Inc., and Mark Cohen, former ceo of Sears Canada.

Heidrick & Struggles, which is handling the ceo search for J.C. Penney, didn’t return a phone call seeking comment.

Elaine Hughes, founder and ceo of E.A. Hughes & Co., a headhunting firm, said, “The candidate has to have prior experience in strategically realigning a business. That’s the challenge, and there are not a lot of people out there....The biggest challenge is they have to assess: ‘Is this fixable? Do I want to enjoy a foundation of a successful formula or go and fix J.C. Penney?”

She said there may be people who are able to do it, but they might not want to leave their ceo jobs, such as Michael Balmuth, chairman and ceo of Ross Stores Inc., or Hicks. “What’s Ken’s incentive to go to Penney’s?” she asked. Another possibility would be Jeff Genette, chief merchandising officer of Macy’s, who’s a strong number two. But Hughes said he probably wouldn’t want to relinquish his role at Macy’s.

She suggested Sadove as a possibility. “He’s very good from a leadership standpoint in managing strong people. He’s young enough and truly a professional. I would love to see him as a contender,” she said. She praised the job he’s done at Saks Inc. and in changing the store’s strategy by devoting significant space to such categories as footwear and designer handbags that have driven sales the past few years.

Howard Gross, partner in Boyden, a global executive search firm, said, “It’s got to be somebody with superior qualifications, and someone who’s been a ceo and is experienced turning around troubled companies. The list will be short. It will be a hard job to fill.”

He added that Penney’s is in “very difficult straits, both financially and morale-wise. “People who are highly qualified might not want to take the step because they might not be able to fix it. Some will raise their hands, but there are only a select few out there,” he said. He noted that someone who’s been a successful ceo of a $3 billion company may not have the right skill set to turn around a troubled company like Penney’s, which is a $12.4 billion company.

Gross said the retailer doesn’t need “another convulsive shock in terms of leadership change.” He suggested they give Ullman a chance to stabilize the organization. As far as the pressure to name a new ceo, he said, “It’s not something that can be accomplished in 30 days. Searches of this magnitude take time.”

Andrew Jassin, managing director of Jassin Consulting Group, said, “It has to be somebody who’s a retailer who understands the game. This will require someone who knows how to do a lot of promoting and comes out of that world, someone who can create magical illusional businesses. It’s clear that Penney’s will have a period of time to survive. I don’t believe the banks will let them fail. Whoever the individual is, they need to make the consumer feel comfortable walking back in.”

Melanie Kusin, vice chairman, board and CEO Services at Korn Ferry, declined to comment. Korn Ferry was hired to find candidates for Penney’s board.

The general consensus is that finding a successor for Ullman won’t be easy.

“Terry Lundgren [chairman, president and ceo of Macy’s Inc.] could do the job, but he’s not moving. Anyone that ran a Macy’s division is qualified, but Gene Kahn [former ceo of Claire’s and chairman and ceo of May Department Stores Co.] is never going to work on that kind of scale. Hal Kahn [former chairman and ceo of Macy’s East] has been retired for 10 years,” said a retail expert.

The expert also said that Rubel is seen as having mainly wholesale experience at J. Crew and Payless, while Brendon Hoffman, who left Lord & Taylor to run The Bon-Ton, “is running a department store, but look at the size and scale. It pales in comparison to Penney’s.”

“My speculation is that he [Ackman] knew he was likely to be the lone wolf,” said Kirk Palmer, ceo of executive search firm Kirk Palmer Associates. “He made the points he wanted to make. If you don’t have the board marching in the same direction, you’re not going to get anything done.”

In terms of ceo candidates, Palmer said, “There’s really not a ton of people out there. When department stores went away, our pipeline for talent went away. There’s a huge generation gap. It’s very difficult for company under a huge spotlight. It’s a real dilemma. There’s probably only four or five people who would be logical choices.”

The timetable for finding a ceo for Penney’s will be dictated by the search process, Palmer said. “One possibility is that the search committee will survey the universe of prospective candidates and conclude that Mike Ullman is the best one to lead the company into the foreseeable future,” he said.

“Ullman is willing to sit in that seat. He has a lot of fixing to do. He’s not a dumb guy. He didn’t preside over a terrible business, it was an OK business. He’s engaged in a battle for survival. The board is being smart to let him drive the ship while they do a search. The backup plan would be to bring in someone who is a first-time ceo or the ceo of a smaller business. In that case you could take Brendan Hoffman and keep Ullman as chairman for a 24-month period.”

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