J.C. Penney Blame Game: Bill Ackman Should Be Ashamed

Earlier this month, J.C. Penney (NYSE:JCP) fired embattled CEO Ron Johnson, after his plan to reinvent the troubled department store resulted in falling sales and big losses. The week before Johnson's firing, activist investor Bill Ackman -- whose Pershing Square hedge fund is J.C. Penney's top shareholder -- said that there was "too much change too quickly without adequate testing" under Johnson. Last week, after Johnson departed, Ackman leveled a further charge: While Johnson worked hard, he wasn't in the office enough. Ackman believes that Johnson should have relocated from California to Texas, where J.C. Penney is headquartered.

However, if Bill Ackman wants to find someone to blame for J.C. Penney's current troubles, he should probably start by looking in the mirror. First, Ackman encouraged J.C. Penney to deplete its cash on a share buyback program, eventually leading to the company's growing liquidity problems. Next, he recruited Ron Johnson and pushed out the previous -- and recently returned -- CEO, Mike Ullman. Last, he sat on the J.C. Penney board throughout the 2012 sales debacle and provided cover for Ron Johnson throughout the year with frequent bullish assessments of the company's prospects.

Money out the window
Ackman's first mistake after joining the J.C. Penney board was pushing for a big share repurchase program. At the 2010 Value Investing Congress, Ackman opined that J.C. Penney had excess cash that could be returned to shareholders . Accordingly, in the first half of 2011, J.C. Penney bought back 24.4 million shares for $900 million: an average purchase price of $36.98.

This maneuver to "return cash to shareholders" -- spearheaded by Ackman -- has clearly backfired. Based on the recent J.C. Penney stock price, these shares would be worth approximately $370 million, so the company essentially "wasted" more than $500 million. Moreover, J.C. Penney recently drew $850 million from its credit line as it ran short of cash to purchase inventory. With an extra $900 million in the bank, J.C. Penney would have a much stronger liquidity position today.

Bring on the pain
Another reason Ackman probably shouldn't blame J.C. Penney's demise on Ron Johnson is that he was instrumental in hiring Johnson. After Johnson's appointment as CEO was announced, Ackman called him "the Steve Jobs of the retail industry." At last year's Ira Sohn Conference -- after J.C. Penney reported a big loss and a 20% drop in sales for the first quarter -- Ackman defended Johnson, calling him the "best guy to run the company." In the same speech, Ackman highlighted why he thought the dismal first quarter did not spell trouble for J.C. Penney, predicting that shares could be worth $77 even in a downside scenario.

Ackman continued his steadfast support for Ron Johnson throughout 2012 and into early 2013, despite the growing signs that his plan was not working. As a board member, the biggest shareholder, and a prominent investor, Ackman could have used his influence to make changes at J.C. Penney, whether that meant telling Johnson to move to Texas, or insisting that pricing and merchandise strategies be tested before full implementation.

Instead, Ackman used his influence to market Ron Johnson's vision and J.C. Penney stock. As late as November -- after three straight disappointing quarters -- Ackman overlooked the vast negatives in public interviews. He professed confidence in Johnson's leadership, and pointed to high sales in the new shops as proof that the promised J.C. Penney revival was taking hold.

Foolish conclusion
Ron Johnson made a lot of mistakes during his brief tenure at J.C. Penney, even if his vision for the company was smart and innovative. However, Bill Ackman should only blame himself for his hedge fund's losses in J.C. Penney. He encouraged the previous management team to buy back shares, even though he was looking for new management to "transform" the company (a mission that was likely to require significant investment). Ackman then recruited Ron Johnson and gave him firm backing for over a year -- in spite of increasing evidence that Johnson's strategy was not working.

Ackman could have sold his interest in J.C. Penney for a big gain as shares skyrocketed in early 2012. Instead, he blinded himself to J.C. Penney's fundamental deterioration. Now his fund is sitting on a big loss, and Ackman himself probably deserves most of the blame.