On Tuesday, Jan. 28, J.C. Penney (OTC:JCPN.Q) and Abercrombie & Fitch (NYSE:ANF) announced changes to their respective shareholder-rights plans (aka poison pills). In response to the changes, J.C. Penney's shares fell 1.4%, while Abercrombie's stock rose 4.8%. What do these changes in each company's poison pill and the corresponding change in share price mean for shareholders going forward? Is the situation at J.C. Penney poised to worsen while Abercrombie's fate is about to improve, or is Mr. Market overreacting to what could be insignificant events?
J.C. Penney gets strict
In 2010, after news broke that Bill Ackman's hedge fund, Pershing Square Capital Management, and Vornado Realty Trust had acquired a combined 26% stake in J.C. Penney, the company's board of directors put into place a poison pill. The company initiated the move to prevent a possible change in control from occurring. The poison pill expired a year later but was adopted once again in 2013 in response to mounting interest from institutional investors and a low share price.
Now, however, the company's board has decided to extend the plan, which was due to expire in August, to January 2017. In addition to the extension, the company lowered the trigger from 10% to 4.9%. What this means is that any new investors who acquire 4.9% or more of the company's shares without approval from the board will trigger the poison pill. This kind of event, if triggered, will mean that existing shareholders (with the exception of the party who triggered the 4.9% threshold) will be given the right to acquire additional shares at 50% of the trading value directly from the company.
The past few years have been particularly hard on J.C. Penney. After seeing revenue drop 25% between 2011 and 2012 and a net loss of $152 million transform into a $985 million loss, shares of the retailer fell precipitously. In an effort to save the business, the board ousted its CEO, Ron Johnson, and replaced him with Mike Ullman, the company's previous CEO. Since making the leadership change, business has begun to show some signs of improvement and, in an attempt to keep the recovery on track, management likely decided on a beefed-up poison pill to fend off takeover artists.
Abercrombie & Fitch opens the floodgates!
The situation facing Abercrombie is similar in some ways but also very different. Just like J.C. Penney, Abercrombie has been having a challenging time lately. Over the past four years, revenue at the retailer rose 54% and net income of $0.3 million transformed into $237 million, but in 2013 the business' financial condition began to deteriorate.
In the third quarter alone, management reported revenue declining 11.7%, while net income of $84 million morphed into a net loss of $15.6 million. Aside from lower revenue, the company's 12.3% rise in selling, general, and administrative expenses is chiefly to blame for the fall in profitability.
In light of the company's recent performance, Engaged Capital, an Abercrombie shareholder, claimed that a leadership change is needed to help Abercrombie recover. In response to this criticism, the board decided to split up the chairman and CEO roles at the company and bring on three industry veterans to help position the business for the future. This, combined with the early abolition of the company's 1998 shareholder-rights plan, might signify that management is looking at the possibility of attracting buyout candidates.
Currently, the conditions at both J.C. Penney and Abercrombie are far from ideal. In an effort to address this recent financial performance, each company has decided to tackle the problem in a different way. J.C. Penney's strategy is to entrench itself with a poison pill and hope that business is improving. On the opposite end of the table, we have Abercrombie, which is all but begging for activists to come into the picture. Right now there is no telling which strategy, if either, is superior, but the strategic moves employed by both companies suggest that opportunities abound.