Bill Ackman recently admitted that he was wildly wrong about J C Penney Company Inc. (NYSE:JCP), its former CEO Ron Johnson and most importantly, JCP stock, costing his hedge fund hundreds of millions of dollars.
““It is a very, very troubled sector,” Ackman said in an interview with TheStreet. “Since my J.C. Penney experience what I should have done is short the entire sector. That would have been a smart move. It’s not what we did.”
Right, Bill.
That’s a little like saying after the fact you should never have gone to the restaurant that gave you food poisoning.
You, like me, and many others were wrong about our assessment of the department store industry. There was no short position to be made because to have made it you would have needed a negative view of both the industry and JCP stock which isn’t what an activist investor is all about.
Activist investors are supposed to be change agents, those prickly people who force CEOs and their boards to be uncomfortable. If done well activist investing can be transformative for those companies on the receiving end of said activism.
The problem with most activist investors is that they don’t care about the company, only their pocketbooks, and often have little direct knowledge about the industries they’re trying to change and that almost always leads to disaster.
Revisiting Pershing Square’s 2012 Presentation
On May 16, 2012, Bill Ackman made a presentation at the annual Ira Sohn Conference in New York. The 64 slides were meant to persuade investors that the turnaround CEO Ron Johnson was executing would deliver significant results down the road.
Entitled “Think Big,” it was meant to chronicle the rise and fall and rise once more of the department store founded by James Cash Penney in 1902.
Many things stand out from that presentation in 2012 that Ackman and anyone else hopeful of a better future for JCPenney might have viewed differently.
I’ll highlight a couple.
Sales Per Square Foot
On page eight of the 64-page tome, Ackman pointed out that approximately 80% of JCPenney’s 544 on-mall stores, which averaged 145,000 square feet per location, were operating in malls that generated $300 per square foot or more in sales, 500 basis points better than Macy’s Inc. (NYSE:M).
Fast forward to today and malls generating $300 per square foot are on their way to extinction. America’s top malls are pulling in $1,000 per square foot in sales or more.
It doesn’t matter that some of JCPenney’s customers might frequent the $300 per square foot mall, most serious shoppers will go to the fancier malls or the discount stores or they’ll shop online.
The middle is rapidly disappearing.
The Dream Team
CEO Ron Johnson assembled a group of executives at JCPenney whose resumes were filled with all kinds of accomplishments at successful companies, some of them even retail.
Including Johnson, you had four top executives who were brought in from Apple Inc. (NASDAQ:AAPL) to save the day. After all, what was trendier then Apple? You could still ask that same question today.
The problem with bringing in Apple people is that they’re used to a technology-driven business where retail is merely the advertising and marketing of its products.
Retail in 150,000 square foot boxes is all about merchandising, presentation and pricing. Apple’s products sell themselves, and they’re in a completely different price range from most of JCPenney’s products.
I, along with Ackman, missed the fact that what JCPenney really needed were two people: a great merchant and a solid real estate expert. Together, they could have sliced and diced the stores into a more profitable footprint.
Fast forward to today and that’s exactly the world in which department stores must now live.
Bottom Line on JCP Stock
The other day I walked through the Hudson’s Bay Co.’s (OTCMKTS:HBAYF) flagship store in downtown Toronto. Part Saks, part Hudson’s Bay, it’s a grand building that’s been spruced up nicely for shoppers.
I couldn’t help but think how sad it is that this kind of shopping environment is quickly disappearing. It harkens back to my childhood watching the original Miracle on 34th Street and thinking how cool it would have been to be Mr. Macy.
I wonder if Marvin Ellison felt that way about the movie? Soon, it probably won’t matter.
When Bill Ackman made his fateful 2012 presentation, JCP stock was trading at $26. Yes, in hindsight, it would have been a great short.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
