J.C. Penney Goes From Bad to Dire

 | Aug 09, 2013 | 10:36 AM EDT
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I have to admit, this Penney-Ackman-Ullman saga has become pretty difficult to stomach. When Bill Ackman took a huge stake in J.C. Penney (JCP) and then pushed for Ron Johnson to come in and turn it around, we were willing to give him the benefit of the doubt. Penney had been struggling for years, and Johnson seemed like an intriguing candidate, given his excellent work with Apple's (AAPL) retail stores.

But this one has been downhill ever since, and as someone who comes from a retail background and has been steeped in it all my life, this Penney tale of woe sure doesn't feel like it's going to end well.

You see, right now is crunch time in retail. If you recall, as Johnson's strategies backfired and sales fell hard, the worries became whether Penney would have enough credit to get through this holiday season. That was a main reason why Mike Ullman, the former CEO, was brought back in, temporarily, to run the place. Sure, Ullman, the man Johnson initially replaced, may not have been setting the world on fire in his first go-round at Penney. But no one had doubted the pre-Johnson balance sheet or Penney's ability to weather any storm. The Ullman era that so angered Ackman had been punchless but not dire.

So when the board tapped Ullman to come back, the bankers and credit holders welcomed the move as a sign of stability, and Ullman was able to raise money at decent terms to keep the business going. Further, the suppliers like Mike. They trust him. They know he will find a way to get them paid. They were willing to ship to him, betting he could get some of the older and now alienated customer base to return.

Now this turmoil is coming at the exact wrong time for investors and the suppliers. It's too hot, too ugly. Ackman's position, now outlined well in the Journal, is that time is precious and that Ullman must go. And while there are lots of reports floating around about dream teams that could replace Ullman, they tend to be a little unrealistic, because who in heck wants to come in and run a company where you have two masters, Ackman and the board, and they are at odds with each other?

The situation seems totally untenable and tenuous, especially when you consider that Ullman didn't have to come back after his unceremonious replacement and was simply trying, initially, to undo some serious damage wrought by Ackman's man, Johnson. He came back simply because he cared for the company and its employees and didn't want to see it destroyed. Even as the numbers were dismal, the company looked to be assured to get through the holiday season in one piece because of Ullman, not despite Ullman.

Now, who knows? It's just too darned hideous for anyone to come in and turn this disaster around after this most recent exchange. Consider, for example, these concerns outlined by an outraged but uninvolved Howard Schultz, the CEO of Starbucks (SBUX), which I received in an email last night:

"I learned today, that Bill Ackman turned on the shareholders OF JCPENNEY and ITS CEO Mike Ullman FOR WHOM I HAVE THE HIGHEST REGARD BY LEAKING a despicable and corrosive email asking that Mike step down as ceo of JCPenney. As a result, I cannot be a bystander and allow this to stand. Especially, WHILE Mike IS workING tirelessly to literally save the company, that Ackman himself, has every step of the way, SEVERELY DAMAGED. There's much more to this story. Ackman has blood on his hands for recruiting and handing over the Crown Jewels of Penney's without the slightest sight of governance to Ron Johnson. With his investment and reputation under water, he's now DESPERATELY rewriting history, bullying the Board, and using his scorched earth strategy to try and salvage HIS ALREADY SULLIED REPUTATION.

"This should not stand without a rebuttal of truth, and yes justice.

"I have not met the man, but Ackman is a destroyer of companies and the very lives of the hard working American's who go to work every day playing by the rules and hoping for the same from the people at the top.

"Bill Ackman should be removed from the Board for violating his fiduciary responsibilities and the rights and lives of the wonderful employees of JCPenney and its dedicated ceo.

"For the record, I am not a shareholder of JCPenney. I just have a vested interest in the truth; and, I see the lives of good people being destroyed."

That's some strong stuff from the man I now regard as the greatest retailer of this generation. I am sure that Schultz's view has become the predominant view in retail circles, including the ones that may be tapped into to get a replacement for Ullman.

Now, Ackman has had his share of wins and losses. He did an amazing job ferreting out the downside of the mortgage industry insurers, and he hit it big in a real estate investment trust, a railroad and a packaged-goods company. But he seems to have stumbled in Herbalife (HLF) and struggled with Target (TGT) and now has been stung badly by Penney.

What I worry about is that if Ullman leaves, whatever is left of the company's reputation with suppliers could leave with him. Who would want to ship to Penney? Who would want to take on the CEO job after reading the words of people like Schultz?

To me, as much as you may want to bargain hunt, this one's not hunting. Penney is dicier than ever. It's just not worth being involved in any way shape or form, from the investors, including Ackman, to the creditors to the salespeople themselves. Time for everyone to cut their losses and move on. 

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