J.C. Penney Takes Another Hit

My brain is starting to cement J.C. Penney (NYSE: JCP  ) and margaritas together in my thoughts -- whenever I hear either term, I think, "On the rocks." Yesterday's bad news came from two sources. It's been reported that investment fund Vornado (NYSE: VNO  ) has sold off a massive chunk of its J.C. Penney holding. According to The Wall Street Journal, Vornado is dumping 10 million shares, and cutting its losses. That has been the main driver behind the stock's 10% midday fall.

On top of that, yesterday the justice overseeing the Macy's (NYSE: M  ) , Martha Stewart Living (NYSE: MSO  ) , and J.C. Penney litigation mess said that J.C. Penney may not ever be able to put Stewart's items on the shelves. The retailer has pressed ahead with the promotion and launch of the line, even as it's being sued by Macy's to stop the partnership. Judge Jeffrey Oing said that he may put the brakes on the whole operation, telling Penney's lawyers, "That's the risk your client took." Is there any hope in sight for investors and the business, or are we watching the last desperate gasps of an American dynasty?

It's not good news
The move from Vornado is clearly the most troubling. The company bought into Penney alongside Bill Ackman back in 2010. In a rare spectacle, the big fund seems to be getting hosed just like the little guy. Vornado has already lost around $300 million on its position, with this newest sale adding to the fall. But the company isn't getting out completely. This sale represents close to 40% of the company's position, which last week accounted for 11% of J.C. Penney's outstanding shares.

The move is obviously an about-face on the company's outlook, and more subtly on the belief that CEO Ron Johnson can make the big difference that he was expected to make. At the time of the Vornado purchase, its CEO Steven Roth had effectively sworn off these sorts of big investments. With the buy, the trust made a bold and loud move. Roth himself said of the deal, "If you look at the math and you look at the investment, I think you'll agree it's a pretty terrific investment." Now that terrific investment -- made at over $25 per share -- is looking horrific.

The pronouncement from Judge Oing just compounds the misery. Not only does J.C. Penney now have to worry about a lawsuit sucking cash out of the company, it also has to worry about sunk investment costs associated with the Martha Stewart shops. Those costs cut into Martha Stewart, as well. The company reported $800,000 worth of Penney-Macy's related legal fees last quarter. 

The fight ahead
For all of the bad news, the legal wrangling is still anybody's game. While Judge Oing has been pronouncing against J.C. Penney, he also shot down a similar injunction last year. That's one of the things complicating the case -- there are odd player interactions. Macy's filed two injunctions last year, one against Penney and one against Stewart. The Stewart injunction was upheld but the Penney injunction wasn't. The judge admits that this is all pretty confusing, but that hasn't stopped him from plowing ahead with all sorts of snippets like the one above.

The effects of the case seem to be heavily weighted in Macy's favor right now. The company is doing well, and is allegedly not overly reliant on Martha Stewart's line. Martha Stewart is also on the rocks, with the stock falling 44% over the last 12 months. Cutting off the lucrative J.C. Penney contract could be horrible news, and set a bad precedent. J.C. Penney is also relying heavily on the deal. Not only will it be selling the merchandise, it also holds 17% of Stewart's stock.

The bottom line
I think a lot of J.C. Penney's current mess lays squarely on the shoulders of Johnson. He seriously needs to rethink his long-term plan, and investors need to be absolutely clear on what they demand from him. With Vornado turning its interest level down, there's going to be a chance for other big investors to take a larger role in the direction of the company. Given Ackman's previous antics, I wouldn't be surprised to see him piping up over the next month.

For investors, the bottom line is inconsistency. The plan hasn't been executed as promised, the future of the Macy's litigation is all but unknowable, and the big names attached to the stock are in motion. Until all that settles down, and until Johnson articulates how the company moves from where it is to where it needs to be, I'd stay well clear of J.C. Penney.

Learn more
J.C. Penney has been a train wreck whose comeback always seems just around the next earnings corner, but investors are beginning to doubt that CEO Ron Johnson can weave the same magic that he did at Apple. If you're wondering whether J.C. Penney is a buy today, you're invited to claim a copy of The Motley Fool's must-read report on the company. Learn everything you need to know about JCP's turnaround -- or lack thereof -- and as a bonus, you'll receive a full year of expert guidance and updates as key news develops. Simply click here now for instant access.


Read/Post Comments (8) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 06, 2013, at 8:08 PM, tucsonkak wrote:

    Just inside JCP today. What a mess. Poor selection, expensive for quality - difficult to find depts. Just walked out shaking my head at how far this name has fallen.

  • Report this Comment On March 06, 2013, at 8:27 PM, golftee6 wrote:

    The first 12 years of my working life were at Penney - mostly in the Buying Office. I then moved to retail leasing and spent 25 years leasing everything from high end malls, resort centers, and power centers. Today, I own my own retail company. My experience tells me that neither the Hedge Fund or Vornado Realty Trust really understands retail. In fact, it is never truly in the interest of the Landlord to fully understand everything that a retailer needs, because they often have to hold someone's feet to the fire. Did Penney need to modernize and make changes. Yes, of course. They had only been threatening to do that for about 40 years with fits and starts, lurching towards the goal. Did they need to walk away from their core customer and abandon their most popular merchandise to appeal to the 15 to 25 year old cohort? STUPID STUPID STUPID. Ron Johnson has been swept away by his own press and arrogance. He never bothered to even try to understand a Corporate culture that started with James Cash Penney, the Golden Rule, and a store in lonesome, little Kemmerer, WY. The only hope is to fire Johnson ASAP, hire back some of the fired employees, and take about 5 steps back. This is a travesty, and a crime for all the former Penney Shoppers and loyal and hardworking employees - and yes, there a bunch of those.

  • Report this Comment On March 06, 2013, at 8:50 PM, BizNShiz wrote:

    I like JCP. Their format of having stores inside their store is interesting. Sephora and others I think. If they can get more branded named smaller stores it would work out. If they could get people like H&M, American Apparel, or similar to bring people in, A lot of JCP's are in places that have never heard of these brands.

  • Report this Comment On March 06, 2013, at 9:48 PM, zubairm wrote:

    I think something is wrong wiith JC Penny's management, it looks they are up to something, there is a strong need of JC Penny type stores.

  • Report this Comment On March 06, 2013, at 10:55 PM, flagellum wrote:

    Unfortunately, for all that has happened to JCP in the last two years, poor JCP now reminds me of a target that now looks like swiss cheese. Fixing it now, seems almost impossible. Their store in our area looks very nice as does the merchandise. It's hard to believe that so many highly paid people could make such a mess of the place. Obviously, none of those involved are worth any where near what they have been paid. Boards should pay for performance and results, not hope and hype.

  • Report this Comment On March 06, 2013, at 11:11 PM, flagellum wrote:

    I don't think Ron Johnson wove any magic at Apple as you state. I am more inclined to think that Apple made Johnson look good. Johnson just happened to be the one to implement the distribution of a product having very high demand. As for CEO Ron Johnson, I don't see him as a very astute investor or even as an investor. For more than the last two years I never felt about JCP the way these highly paid people behaved. They all should have talked to their bean counters. I dumped my JCP a few years ago. If Bill Ackman would use his analytical skills for more than trying to make a quick killing via a real estate transaction, he might make better decisions. He must think he is Irwin Jacobs or someone similar.

  • Report this Comment On March 06, 2013, at 11:25 PM, flagellum wrote:

    My mistake. I meant CEO Steven Roth is not what I would describe as an investor.

  • Report this Comment On March 07, 2013, at 9:47 AM, Dowjon70 wrote:

    When the Board of Directors finally comes to its senses and fires Ron Johnson, I'd be happy to come to JCP to be the next CEO. The next CEO is going to look like a retail genius if he or she simply follows the basic principles of retailing 101. This guy clearly has no clue as to how to run a mid tier retail organization. I'd be willing to take the job for $500k for the 1st year and will step down if I don't realize 15% comp store growth.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2296837, ~/Articles/ArticleHandler.aspx, 10/20/2014 7:28:33 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement