Bill Ackman was clamoring for attention once again this past week. The hedge fund manager and activist investor stirred up a storm about replacing J.C. Penney (NYSE: JCP ) CEO Myron Ullman just four months after he was tapped to step in for Ron Johnson, the former CEO hand-picked by Ackman whose tenure was nothing less than a disaster. During his year-and-a-half at the helm, sales plummeted 25% as his turnaround strategy alienated JCP's loyal customers.
Ackman, whose Pershing Square Fund is J.C. Penney's largest shareholder, with an 18% stake, resigned his seat on the board after apparently leaking a private letter calling for a new CEO, stirring animosity from his fellow board members, other JCP shareholders, and even Starbucks CEO Howard Schultz, who called it "despicable." Ackman is now about $600 million in the hole on his investment in the retailer, having purchased the bulk of his stake near $26, but he has no one to blame but himself for the loss.
Not only was Ackman responsible for Johnson being installed as CEO, but his recent tantrum has eroded further value from the stock, scaring suppliers and embarrassing the consumer-facing company at a key time of year. Specifying the qualifications for a new leader, Ackman said, "We need a CEO with extensive, ideally department-store retail experience, strong operational skills, and a strong public company track record. ... We can't afford to wait." Ironically, both Johnson and Ullman would seem to fit that bill as well as anyone in retail.
J.C. Penney isn't the only company Ackman's been catastrophically wrong on this year. Shares of Herbalife have more than doubled since the hedge fund manager revealed a short position and called the company a "pyramid scheme," which was timed with extraordinary put-buying by the market . Since then, the 33-year-old company has crushed earnings estimates twice, and reported its best quarter ever.
Is there life after Ackman?
J.C. Penney shareholders may be relieved that Ackman has stepped down from the board, but unfortunately, the company is facing a more serious challenge than its rogue ex-director.
Since coming back as chief, Ullman has twice revised company forecasts down, and analysts are now expecting a per-share loss of $1.02 when it reports earnings next Tuesday. But the decision of who will replace interim CEO Ullman may be irrelevant, as the company's troubles seem to be beyond a savior. Winning back the customers lost under Johnson will not come easy, and with $3 billion in debt, the company can only afford so many more cash-burning quarters. It lost $820 million in free cash flow last year, and nearly $1 billion in the first quarter of 2013 alone.
Penney shareholders may despise Ackman, but with his 18% stake in the company, they need him more than ever now. With the stock price down to just a piddling $12, a decision by Ackman to unload his stake could sink shares further into oblivion, both by tipping the scales with the additional supply of 39 million shares on the market, 3.5 times JCP's average daily volume, and because his departure would signal that the company's most fervent believer has officially lost faith. Ackman is restricted in how he can sell off his shares, but if this is the Titanic, retail investors should want Ackman to go down with them.