Investors Are Saying Goodbye to J.C. Penney on a Grand Scale



Weather has not been good for employment and it has not been good for the retail sector. The U.S. Department of Commerce reported Thursday that retail sales totaled $427.8 billion last month, a decline of 0.4 percent. Meanwhile, December’s sales figure was downwardly revised from 0.2 percent gain to a 0.1 percent drop, making January the second consecutive month of negative growth. Even though it seems last month’s lower spending was the result of frigid temperatures and not intimately linked to worsening economic trends, the drop does suggest that the economic momentum from consumer spending that was growing at the end of 2013 has lost steam in the new year. After the report, Barclays Research lowered its estimate for 2013 fourth-quarter gross domestic product by four-tenths of a percentage point to a sluggish annual pace of 2.2 percent, a significant lower level than initial estimate made by the federal government earlier this month.

But “when weather normalizes, the economy should regain its prior momentum and sales growth will re-accelerate,” Moody’s Analytics analyst Scott Hoyt told the Los Angeles Times following the retail sales report. Similarly, Paul Dales, an economist at Capital Economics, wrote in a research note acquired by the publication that the data was not too concerning as the firm’s “positive outlook for employment suggests households will still have the funds to spend at a healthy rate.”

That assessment may be good news for most retailers, but for J.C. Penney (NYSE:JCP), room to maneuver is not overly abundant. Sales at the struggling retailer did improve in the key holiday shopping season; although coming in below the 4.2 percent expected by analysts, same-store sales rose 2 percent in the November through January quarter. But that gain was not nearly strong enough to erase from investors’ minds the 31.7 percent plunge same-store sales took during the 2012 holiday season, a period that capped the disastrous tenure of former Chief Executive Officer Ron Johnson. Even with the evidence of modest improvement, major institutional shareholders are exiting their J.C. Penney positions.

When the retailer publishes its proxy statement this spring, notable names will be missing from its shareholder lineup, as a string of recent security filings made clear. Hotchkis & Wiley Capital Management, a firm that owned 6.32 percent of the company’s share according to J.C. Penney’s 2012 proxy filing, has reported that it no longer owns the retailer stock. Longtime shareholder Dodge & Cox has shed its 9.21 percent stake as well, and even a recent buyer, Hayman Capital Management, sold off its 5.2 percent stake. In 2013, both William Ackman’s Pershing Square Capital Management and Vornado Realty Trust made high-profile exits, unloading a combined 24 percent stake. Meanwhile, Evercore Trust (NYSE:EVR) lowered its stake to 4.12 percent from 5.33 percent. But BlackRock (NYSE:BLK) raised its stake from 6.6 percent to 8 percent in 2013.

Over the course of 2013, shares of J.C. Penney lost 51.77 percent of their value — and that plunge followed a 46.03 percent drop in 2012. Even this year to date, investors have bid shares down 32.35 percent.

Except for a brief period at the end of last year, J.C. Penny investors were hesitant throughout 2013 to subscribe to the nascent recovery story that company executives insisted was underway, as the stock’s movement illustrates. Shares of the century-old department-store chain opened on January 2, the first trading day of 2013, at $20.01, a price 40.71 percent below its year-ago level. On February 22, the stock rose to the highest price it would reach last year, touching $23.10 during the day’s trading. However, from that moment, shares have charted a generally downward course.

The replacement of Ron Johnson, whose predecessor, Mike Ullman, took over as chief executive in April, prompted a significant selloff, as did the late September announcement that the company would be sell 84 million shares in a public offering to raise cash. Following the news, shares dropped to what was then a 13-year-low of $9.93 per share. Share price continued to drop, pressed to further lows by concerns for the company’s liquidity.

After Ullman returned to J.C. Penney in April, the company “moved quickly to stabilize our business — both financially and operationally,” as the Chief Executive explained in the retailer’s second-quarter earnings report. The second-quarter was the first full period under Chief Executive Mike Ullman, who returned to J.C. Penney after his successor Ron Johnson was ousted by the board in April. Johnson, the former Apple executive that was hand picked by one-time board member and largest shareholder Bill Ackman, led the company to a 25 percent plunge in revenues, a 50 percent decline in stock price, and a 13 percent drop in customer traffic — solid proof that the makeover he attempted to orchestrate was a failure. Ullman has been intensifying efforts to revive the company this year, and plans to close 33 stores and eliminate about 2,000 jobs.

The recovery campaign — which depended on leaving behind Johnson’s disastrous implementation of a new pricing structure that dropped sales and discounts in favor of “everyday low prices” — has improved the company’s retail health but investors are still spooked.

Investors are not the only people leaving J.C. Penney; the company announced Thursday that Chief Financial Officer Ken Hannah will step down and be replaced by Ed Record, who has 25 years of experience in the retail industry. Record “is very well respected throughout the industry and will add a critical layer of capital discipline that JCP requires at this stage of the game,” Sterne Agee Charles Grom wrote in a note obtained by the Los Angeles Times.

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