J.C. Penney Board, Howard Schultz Totally Wrong to Blame Bill Ackman

J.C. Penney Board, Howard Schultz Totally Wrong to Blame Bill Ackman
Source: jcp.com/ jcpnewsroom.com

So Bill Ackman sent a “get your ass in gear” letter to the board at J.C. Penney Company, Inc. (NYSE:JCP) yesterday. Of course much of the reaction has been to blame him for the current situation the company is in. I think that is a bit of Monday morning quarterbacking. Let’s not forget that had J.C. Penney done nothing and left Ullman in charge, we’d probably be sitting here in this same situation anyway. Let’s also not forget that no one doubted the Johnson hire at the time and the reaction of the stock price post hire backs that.

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 J.C. Penney Board, Howard Schultz Totally Wrong to Blame Bill Ackman

But, for arguments sake, let’s pretend none of that is true. Does it matter? J.C. Penney admittedly thinks they need a new CEO. When Ullman was brought back it was as a “temporary CEO”. So if we are looking out the windshield and not the rear view mirror, what is taking so long? There can’t be more than a dozen people out there who could do the job and the board could have spoken to all of them 4-5 times already by now.

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Lest anyone forget, he IS the LARGEST shareholder which means he is the LARGEST OWNER of J.C. Penney. Boards of directors always seem to be forgetting this fact. No matter who the person is who sends the letter, the FACT that someone is the largest shareholder entitles them to call some shots.

Now, Howard Schultz called Ackman’s move “disgusting” in an attempt to come to the aid of his friend Ullman who sits on the Starbucks Corporation (NASDAQ:SBUX) board. To me this reeks of hypocrisy on the part of Schultz. Let’s not forget that in 2007 Schultz sent a memo to then CEO Jim Donald (who Schultz had a hand in making CEO) voicing his displeasure with the direction of the company. The private memo was then “leaked” to the media and Donald was soon let go and replaced by……Schultz. I’m gonna go way out on a limb and assume Donald did not leak a critical private memo from Schultz to the media……just a hunch. So, that leaves who as the “leaker”??????

But hey, as the founder and huge shareholder, Schultz had every right to do what he did. I’m just calling BS on his assertion that other major shareholders at other companies cannot do the same.

The J.C. Penney Company, Inc. (NYSE:JCP) letter:

To My Fellow Directors:

I am very concerned about the future of J.C. Penney. While I supported the decision to bring back Mike as an interim CEO, it was based on Tom’s statement that we would immediately launch a search process for a long-term CEO.

It was not until the July 22nd board meeting, nearly four months later, that the board agreed to make the succession issue part of the agenda. More than two weeks have passed since the formation of the search committee and we just hired a search firm. My understanding is that the search firm intends to begin a process of interviewing directors individually to build a consensus as to the type of CEO we are looking for. This will take weeks in light of summer schedules, and is not a prudent use of time.

Considering the scale of J.C. Penney, the seriousness of the issues it faces, and the complexity of its business, there are only a handful of executives with sufficient talent and experience to take on the CEO role. We need a CEO with extensive, ideally department-store retail experience, strong operational skills, and a strong public company track record. When non-competes, geographical considerations, and other personal and timing issues are considered, the number of potential CEO candidates is quite limited.

Allen Questrom, who saved the Company once before – the stock rose from $13.94 to $39.10 during his four-year tenure – has agreed to return as Chairman of the board and assist in the turnaround as long as we hire a CEO that he supports. Allen believes that a thorough vetting of the limited potential available candidates can be accomplished in 30 to 45 days.

In light of the above, and as J.C. Penney’s largest shareholder, I strongly urge that we immediately put together a short list of candidates, determine their interest level, and schedule a fast-track interview process with the board. There is no reason that this process could not be completed in the time frame that Allen recommends.

We can’t afford to wait.



The J.C. Penney board responded:

Plano, Texas (August 8, 2013) – Thomas Engibous, Chairman of the Board of Directors of J. C. Penney Company, Inc. (NYSE: JCP), today responded to the public disclosure of a letter to the Board of Directors from William Ackman, head of the investment firm Pershing Square Capital Management, L.P. and a J. C. Penney director.

On behalf of the Board of Directors, Mr. Engibous said, “The Company has made significant progress since Myron E. (Mike) Ullman, III returned as CEO four months ago, under unusually difficult circumstances. Since then, Mike has led significant actions to correct the errors of previous management and to return the Company to sustainable, profitable growth.”

Mr. Engibous noted that this includes critical work to stabilize the organization, improve the Company’s financial position, bring inventory back to appropriate levels across all businesses, restore successful private brands – notably in time for back-to-school – address issues in the Home business, make the stores easier to shop, and reintegrate the online business with stores.

“Mike is the right person to rebuild jcpenney by stabilizing its operations, restoring confidence among our vendors, and getting customers back in our stores. He has the overwhelming support of the Board of Directors, and we are confident the Company is in good hands.”

Mr. Engibous continued, “When Mike returned, it was understood that there would be an effort to rebuild the management team, including a search process to identify his successor. The CEO search process, which began in earnest three weeks ago, will be careful and deliberate to ensure we find the right long-term leader for jcpenney. In the meantime, Mike and the leadership team will continue the work underway to improve the Company’s performance and get back on a path to profitable growth.”

Mr. Engibous concluded, “The Board of Directors strongly disagrees with Mr. Ackman and is extremely disappointed that his letter was released to the media at the same time that it was sent to the Board. Mr. Ackman has been integrally involved in the Board’s activities since he joined two years ago. This includes leading a campaign to appoint the Company’s previous CEO, under whose leadership performance deteriorated precipitously. His latest actions are disruptive and counterproductive at an
important stage in the Company’s recovery.”

Okay, here is the thing:

Only a retard would think Ullman is the “right man for the job” at this point. He is after all “the man” that was leading J.C. Penney Company, Inc. (NYSE:JCP) into a downward spiral before he was replaced by Ron Johnson. Now, Johnson clearly wasn’t the “right man” for the job either but it wasn’t because his ideas were terrible, and as an operations guy he sucked. I still believe the “shops” concept in J.C. Penney Company, Inc. (NYSE:JCP) could be a huge winner IF the concept is executed correctly. If there ever was a case for a “dual”  J.C. Penney CEO, the period that Johnson was there fits.

Now, IF indeed Ullman was a “temporary”  J.C. Penney CEO then it is wholly inexcusable that the board is only now in August searching in earnest for a replacement. The “relationships with vendors” excuse is garbage, as a well known CEO from another retailer would have similar relationships and reputation with vendors. It would only be the hire of an “unknown” that might spook vendors and I think we can all agree after the Johnson experiment, the next person will have retail CEO experience need for J.C. Penney.

If the J.C. Penney Company, Inc. (NYSE:JCP) board is pissed at Ackman for going public, it has no one but itself to blame. There is no way this is the first conversation that has taken place on the subject since Johnson was let go this spring. No way in hell. In the overwhelming majority of cases a shareholder going public like this is out of frustration at getting stonewalled to this point. While I cannot say for sure (having no proof), I would just about guarantee Ackman has been pushing for a new CEO for months and essentially been ignored.

Now, if indeed Questrom is up for coming back as chairman, I’m finding it hard to find a reason that would be a bad thing. He knows the company and it flourished under his leadership from 2000-2004. The obvious choice is the Saks CEO, who will be leaving in a bit now that Saks has been bought out. I’m sure there are others but that is the first that pops into my mind.

Bottom line? The J.C. Penney Company, Inc. (NYSE:JCP) board has dragged its heels far, far too long on this and has no right to get pissy when its largest shareholder (they are the owners after all) finally decides to air displeasure with this fact publicly. No right at all. Also, with all due respect, Howard Schultz should just focus on SBUX and not opine on companies he has no stake in.

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Todd Sullivan is a Massachusetts-based value investor and a General Partner in Rand Strategic Partners. He looks for investments he believes are selling for a discount to their intrinsic value given their current situation and future prospects. He holds them until that value is realized or the fundamentals change in a way that no longer support his thesis. His blog features his various ideas and commentary and he updates readers on their progress in a timely fashion. His commentary has been seen in the online versions of the Wall St. Journal, New York Times, CNN Money, Business Week, Crain’s NY, Kiplingers and other publications. He has also appeared on Fox Business News & Fox News and is a RealMoney.com contributor. His commentary on Starbucks during 2008 was recently quoted by its Founder Howard Schultz in his recent book “Onward”. In 2011 he was asked to present an investment idea at Bill Ackman’s “Harbor Investment Conference”.
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