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Give peace a chance.
This story first appeared in the August 13, 2013 issue of WWD. Subscribe Today.
That appeared to be the attitude of the two warring sides at J.C. Penney Co. Inc., as the retailer’s board was said to be in talks late Monday with William Ackman of Pershing Square Capital to reach some resolution in their bitter battle.
The talks came as Penney’s board appeared to be digging in against Ackman’s assault on both its chairman, Tom Engibous, and its chief executive officer, Myron “Mike” Ullman 3rd. On Monday, in a major vote of confidence, George Soros reportedly sided with the Penney’s board.
Soros, whose Soros Fund Management has a 7.9 percent investment in the retailer, has told the Penney’s board that he supports Ullman and his team. Soros’ fund last week was said to be withdrawing its money from Pershing Square, supposedly due to performance. An executive from Soros Fund did not return a request for comment.
Also reportedly in the fray is Glenview Capital Management, which has a 4.3 percent stake in Penney’s, although there were conflicting reports on whose side Glenview was on. A Glenview executive did not return a call for comment.
Ackman, who owns 17.7 percent of Penney’s, enlisted the support of Richard Perry of Perry Capital, who holds 7.3 percent of the retailer, in trying to oust Ullman and Engibous. Ackman’s goal is to recruit Allen Questrom as chairman and accelerate the search for a new ceo.
RELATED STORY: Perry Capital Joins the Penney’s Fray >>
Shares of Penney’s rose 2.3 percent to $13.17 in heavy trading Monday. Nearly 30.6 million shares traded hands, well ahead of the 11.1 million daily average for the past three months.
While some analysts are pushing for the appointment of Ken Hicks, currently chairman, president and ceo of Foot Locker Inc., to succeed Ullman, it’s unclear whether he’s in a position to jump to Penney’s anytime soon. Hicks’ contract at Foot Locker doesn’t end until January 2015 and includes a provision that bars him from competing against the footwear chain for two years following the termination of his employment agreement. While that could be a point of negotiation, it still might not be so easy to extricate him. Hicks served as president and chief merchandising officer at Penney’s from 2005 to 2009
The inter-board battle is taking place against the backdrop of Penney’s continuing struggles. Most vendors, analysts and other observers contacted Monday believe that the two things the retailer needs are time and money — and that Ullman should be given more time to see through is turnaround plan.
Some factors on Friday said they were still supporting Penney’s, such as J. Michael Stanley, managing director at Rosenthal & Rosenthal. Some credit analysts said the same. What’s unsaid is that everyone is using the only financial report they have had access to, which is the first-quarter earnings results reported on May 16. Penney’s second-quarter results will be reported on Aug. 20.
Bob Carbonell, executive vice president and chief credit officer for credit checking firm Bernard Sands, said, “The day after the report is when everyone will decide what to do, since by then they’ll have had the chance to review the financials. The factors will make their decisions, as will the credit agencies. The vendors will have to make business or credit decisions, with credit decisions based on the numbers and business decisions based on whether they can afford to ship to Penney’s regardless of the credit determination.”
Most financial and credit professionals believe the retailer has decent liquidity for at least another nine or 10 months. That’s even given the expected $600 million to $800 million in cash burn for the first half of the year, according to one factor.
But Penney’s also has little room to maneuver. The retailer was able to obtain a new $2.5 billion term loan with Goldman Sachs, but had to pledge its real estate to secure it. Penney’s owns about 426 of its 1,100 stores. Unlike Edward Lampert, ceo at Sears Holdings Corp., who can sell more real estate assets to shore up a lackluster balance sheet, Ullman no longer has that option.
Credit sources also said the big snafu with CIT was precipitated over a $100 million letter of credit. Ullman was in New York at the end of July, seeking to get back the letter of credit. According to sources, CIT said it would give back the letter of credit, but if it did so, would in turn stop checking orders. Ullman went back to Penney’s headquarters in Plano, Tex., with the letter of credit still in place and CIT, according to Penney’s, is still approving orders. A spokesman for CIT declined comment.
According to another credit source, “The expectations [of a good quarterly report] are pretty low. That’s because there were a lot of capital expenditures in the second quarter, which pushed the cash-burn rate higher.”
The source noted that if Penney’s could have $2 billion in liquidity going into the second half based on $1.5 billion in cash and $500 million availability on its revolver, the “retailer could get through the second half with cash flow at neutral. That’s because the expectation is that there would be little to no capital expenditures planned for the second half.”
The credit source was more concerned over what impact the Ackman fight would have on the confidence of Penney’s vendors. “If Perry and Ackman also were going to put more cash in to recapitalize the company, that would be one thing. I think it is unrealistic to expect things to turn around in the second quarter after the five previous quarters’ results. While the company needs to show some progress, a public fight is of no help. What they need to do is work together on alleviating any concerns vendors may have on the current strategy,” the source said.
Others also seemed more in Penney’s camp than Ackman’s.
Bernard Sosnick, an analyst at Gilford Securities, was critical of the activist investor. “Bill Ackman, in our opinion, has been a destructive force,” he said. “Penney’s had fixable problems but veered to the verge of declaring bankruptcy. We surmise much of it was due to Ackman’s meddling….We do not trust Ackman’s input in a search for a new ceo given his previous performance, nor should other board members. We surmise that Questrom would not welcome his second-guessing. We urge Ackman to resign from the board. The damage inflicted on Penney’s needs to be corrected by a knowledgeable retailer, not by a backseat driver whose license ought to have been revoked.”
Sosnick said his visits to Penney’s stores show that traffic has improved and that customers are buying on key shopping dates.
J.P. Morgan analyst Matthew Boss said, “The future of [Penney’s] has reached a critical inflection point, with control of the company the topic du jour.”
But the board continues to hold sway. Boss said the current composition of Penney’s board appeared to be “well protected” for the next year. To remove an officer, at least six of the company’s 11 directors would have to approve of the move at a special meeting of stockholders.
James Schaye, ceo of Eaton Hudson, an asset disposition adviser to retailers, said, “These are internal issues that should not be played out in public. Directors have fiduciary responsibilities. Ackman is the one who brought in [former ceo Ron] Johnson and started this whole problem….I’m not saying whether Ullman is good or bad, but he walked into a disaster. Whether it’s Allen Questrom, Ken Hicks or Terry Lundgren, it takes time to unwind a situation such as that at Penney’s. If Ackman wants that kind of quick change, it can be done at a specialty store. It’s different at department stores — they are ocean liners and change takes time.”
Schaye also pointed out that the sooner the battle fizzles out, the better for Penney’s. “If you are a vendor doing business with Penney’s, and you are a significant vendor, you would be very concerned about your future there and you start to look for alternatives. Good brand opportunities won’t go first to Penney’s as vendors may decide to seek safer waters,” he explained.
Michael Appel, president of consulting firm Appel Associates, which specializes in turnarounds and management performance improvement, said, “It would be a mistake for Penney’s to change its ceo at this delicate point in time. Anyone new brought in will have a learning curve. Ullman is trying to stabilize the company, and bringing in someone else will further destabilize the company.”
The consultant is not a fan of the public fight, saying that the fight is “taking everyone’s focus away from executing the turnaround strategy. They have plenty on their plate.”
Appel explained that destabilizing the firm would have a major impact on employees, who may decide to jump ship and leave, and vendors, who may elect to not ship because they can’t chance the risk of not getting paid down the road.
Appel also said “Ullman did the right thing in drawing down the credit line to get additional liquidity into the company since he knew it would take time to work on the turnaround.”
Vendors contacted believe that Ullman is making some good moves, and the retailer is headed in the right direction. He just needs more time.
“It’s a very unique thing that’s going on. Ullman was there, they replaced him and he just came back. He’s walking into a huge turnaround, which is no fault of Ullman’s,” said Allen B. Schwartz, founder and designer of A.B.S. by Allen Schwartz, which has licensed the Allen B. collection to Penney’s. “The new advertising looks great, and it’s a step in the right direction.” He said he went to the Penney’s seminar recently and it was a “very positive and open meeting.”
“Ullman has to get in there and instill confidence in the manufacturers that they want to do business with. Everyone has to be very transparent and know where they stand,” he said. During the Johnson regime, many of the manufacturers didn’t know where they stood, and many got dropped as the retailer went from 400 resources to 100 resources. “They need those resources back. They need to restore relationships,” he said.
Schwartz, noting that Johnson lost $3 billion to $4 billion in gross sales, said that Penney’s has to have the fashion signature brands. “They have to restore confidence in the customer through brands with heritage and their own brands. They have to energize the company.”
He wasn’t kind in his assessment of Ackman. “Ullman is a clothing guy and people trust him. Ackman is a raider. On what basis did he have to remove somebody and bring in somebody from Apple?” asked Schwartz. “You have to give Ullman a chance. He’s been there a few months. They’ve pissed off the consumer, and they have to get that customer back,” he said.
He said he sees the TV ad campaign everyday “and it’s very upbeat and positive. It’s starting to restore the confidence. Then you need the assortments.
“Ackman can sit on the sidelines and criticize. I’d like to snap my fingers and change things, too. Ullman’s got a big challenge ahead of him,” he said.
Bud Konheim, ceo of Nicole Miller, which has the Nicole by Nicole Miller apparel and accessories collections at Penney’s, believes that Ullman has the talent in his bullpen. He said that Ullman was running the store when it was making money and was profitable.
“There was an unfortunate year and a new plan executed by Ron Johnson in a hasty way. Ullman needs to use the talent and get the customers off the street and into the store to buy several things, pay and go home,” he said.
Konheim said Nicole Miller has 17 different categories of merchandise at Penney’s. “What’s going on in the boardroom is a stock fracas. Do you think the customer cares about this? It’s Don Quixote tilting at windmills. Do you think you can change the entire thing by changing the ceo?” asked Konheim.
He said that Questrom is a great ceo, Ken Hicks is a great ceo and Ullman is a great ceo. “They’ve all been there. Where is the magic wand?” asked Konheim.
He suggested the company lock up the board so they don’t talk. “Ullman has to sequester the board of directors so they don’t go public and he can work out what’s necessary to get customers to shop at J.C. Penney,” said Konheim, adding Penney’s is a $13 billion business. “It’s not insignificant. It was $18 billion to $19 billion. So what’s the upside for Penney’s? To get back to $19 billion? And who was running it then? Ullman,” said Konheim.
“Our business there is great and getting better,” he continued, adding sales are increasing, but prices took a hit when Johnson was adjusting them. “That’s changed now. Now we’re getting the benefit of adjusting the prices, and now the dollar and units are starting to climb. Who did that? Ullman.”
Right now, vendors are working on May 2014. To change something takes 10 to 11 months, said Konheim. If Questrom and Hicks came in, “they’re not Carnac the Magnificent.”
“You can’t run a sensible giant business in a crisis mode. Everybody second guesses everybody. Right now, there’s no crisis at all. The tantrum is not helping. It doesn’t mean anything to the customer on the street.”
Konheim said he worked with the Penney’s management last week, “and management, from [chief merchant] Liz Sweney down, is focused and has its eye on the ball. There’s good mood and it’s positive. They’re building some good-looking floor sets for April and May 2014. It won’t quiet down until the August figures come out, and they’ll be bad, and it’ll be no surprise.”
“It’s not a new vision that is needed, it’s a steady hand,” said industry consultant Allan Mottus.
He noted that the key objective now is to have a ceo who is pragmatic enough to be able put together a merchandise plan that can spark a successful holiday selling season, while generating needed cash flow. “Keeping the business up for the holidays is what it’s all about,” Mottus said. “Ullman is an honorable guy; he is what he is.”
Just as Penney’s is not suffering with its cosmetics business — the Sephora counters are holding their own in sales — the problem goes beyond this particular retailer. “The real key is not just Penney’s, it is the malls,” he said, noting that Penney’s coanchors many shopping centers with Sears, which he described as struggling. “We are in a critical time,” Mottus said.
If sales are down, so is traffic. It’s all a reflection of “people being poorer than they were,” Mottus said. Ullman needs to get Penney’s back on track after some of Johnson’s unwise moves. For instance, Mottus pointed out that the former ceo invested money in creating kitchen departments only to learn later that the stores’ plumbing could not handle it.
Meanwhile, Penney’s is already trying to win back its former customers by going back to promotions.
According to Traci Gregorski, vice president of marketing at Market Track, a data-driven and pricing intelligence analytics firm, Penney’s has gone back to its cadence of promotions.
“They have done a complete increase in both print and digital promotions year-over-year,” she said.
Last year’s marketing focus was more on branding, while this year saw the “return to offering discounts and deals on products,” Gregorski said.
In the push for the back-to-school selling season, Market Track’s marketing chief said that Penney’s and Macy’s are on par with their promotions, while Kohl’s is the retailer that has a higher print volume with its weekly circulars and number of products represented in those circulars.