Investor Bill Ackman’s decision to take a $400+ million haircut and sell out of troubled retailer J.C. Penney Company, Inc.(NYSE:JCP) is likely the best outcome for all parties, at least in the short-term. Ackman’s position as the largest shareholder (through his Pershing Square hedge fund), and his presence on the board, were a source of too much distraction for both J.C. Penney Company, Inc.(NYSE:JCP)’s management , and likely for Ackman himself.
Now that Ackman has moved on, it’s worth reevaluating J.C. Penney Company, Inc.(NYSE:JCP) and seeing if this changes the story.
One less distraction
Since taking his role on the board following the initiation of a nearly 18% stake in the company back in 2010, Ackman was right in the middle of driving change at J.C. Penney Company, Inc.(NYSE:JCP). Starting with the ouster of former-come-again CEO Mike Ullman, and his replacement with Ron Johnson after successful retail stretches at Target and Apple, Ackman pushed hard to remake the company in the image that he thought it needed. And while we can argue all day whether or not Johnson’s marketing and merchandising strategy would have eventually worked, the short-term pain–to the tune of billions of dollars in losses and a more than 60% drop in the share price–was just too much for management and the board of directors to take.
The end result, besides that mountain of lost cash?
- An alienated customer base
- Nearly two years of lost ground to competitors
- A management team and board in disarray
And Ackman’s decision to not just resign from the board, but to exit his position in the company, will probably help J.C. Penney Company, Inc.(NYSE:JCP) to move forward. So what does management do now?
That’s the $64,000 question. The more important question is, “what should investors do?” Let’s dig into some of J.C. Penney Company, Inc.(NYSE:JCP)’s peers for a little context.
Not a value play
Sears Holdings Corp (NASDAQ:SHLD) is often mentioned in conversations regarding Penney. It’s hard not to draw similar conclusions with two old retail behemoths that didn’t really do much to stay relevant in a changing world. However, where Sears Holdings Corp (NASDAQ:SHLD) has significant value is in its real estate holdings, which are worth maybe as much as four times the company’s current market capitalization. Unfortunately, J.C. Penney investors can’t count on this same value play.
Per Reuters, Penney’s real estate value is around $4 billion. However, the company also has $2.9 billion in long-term debt, greater than the company’s $2.8 billion market cap, meaning that the asset value doesn’t create upside from today’s share price for Penney as it does for Sears.