Here’s Why Ackman Called JCP’s Turnaround A Near Disaster

hedgefund2Hedge fund manager William Ackman — whose Pershing Square Capital Management is the largest shareholder of struggling retailer J.C. Penney — has offered a rare critique of the company’s chief executive officer. Ackman sits on J.C. Penney’s (NYSE:JCP) board, invested $800 million in the retailer, publicly supported Ron Johnson’s turnaround, and even hand picked the chief executive for the leadership role. But now he has expressed the belief that Johnson has made “big mistakes” and the impact of his turnaround plan has been “very close to a disaster,” so the “criticism is deserved.”

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“One of the big mistakes was perhaps too much change too quickly without adequate testing on what the impact would be,” Ackman said on Friday at an investment conference sponsored by Thomson Reuters.

Johnson’s plan to streamline the company’s operations was admirable; he envisioned a company that could offer everyday low prices and boost its offerings with a wide range of small boutiques from designers from Levi’s or Sephora. But his attempt to revitalize the chain and transform its business, from pricing to customer experience, has not happen. The change of the company’s pricing structure – which eliminated coupons and massive sales in favor of prices 40 percent lower  – drove customers away instead of drawing them in.

After the company reported a 25 percent drop in fiscal year sales at the end of February, Johnson said that J.C. Penney would resume the use of discounts and sales to bring back customers…

Ackman did note that Johnson faces one of the hardest tasks in corporate America: cutting the retailer’s costs and updating its merchandise selection. However, he tempered that comment by acknowledging that “the impact has been, on a consolidated basis, very close to a disaster.” Right now, the chief executive is “working very aggressively with his team to fix the mistakes that have been made, and there have been some big mistakes,” Ackman added.

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While the hedge fund manager is “a favorite with pension funds and wealthy investors,” according to Reuters, Ackman has come under criticism for bets he has made on retailers in the past — like the stakes he took in Target (NYSE:TGT) and Borders. Already, Pershing Square has lost approximately $500 million on paper from its J.C. Penney investment.

At the investors conference, Ackman also discussed his other high profile and controversial investment: the $1 billion short bet he took on nutritional supplements company Herbalife (NYSE:HLF). “Taking a short position and going public with it is a pretty serious business,” Ackman said. “Did I think a group of hedge fund managers would take the other side of the trade and try to orchestrate a short squeeze? No, I didn’t think that,” he said about the opposing positions taken by Carl Icahn and Daniel Loeb.

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