Activist Investor William Ackman Romances JCPenney, Perhaps to Distraction
Activist investor William Ackman may be very adept in stalking and snagging shares of any retail chain he sets his sights on. His latest conquest is JCPenney (JCP), where stealth purchases put his stake at 16.5 percent. His reward: a seat on JCP's board alongside an allied investor, Steven Roth of Vornado Realty Trust. Yet while the spotlight glares on Ackman's reputation as corporate raider, I want to know what he knows about clothes.
It's not a frivolous question. Showing up to meetings, interviews, and the occasional court date, the billionaire hedge fund manager looks appropriately dapper, his sharp sartorial sense set off by a shock of silver hair. You can bet he doesn't buy his suits, or his sportswear, at JCPenney. And that's a potential disaster for the department store chain that's struggling to raise its fashion quotient.
Work-in-progress
JCPenney's C-suite put some serious muscle into soft goods in 2010, with good reason: Apparel makes up half of JCP's annual sales volume. So management strategies focused on partnernships and several high-profile matches were made. Here at BNET, I've reported on the birth of JCP's celebrity collaborations with the likes of the Olsen twins and exclusive collections with uber-hip brands like Mango and French Connection.
JCP threw over a million dollars into ads hawking style during the Oscars.There was the ed-vertorial push with People StyleWatch and the recent launch of its Facebook store. JCP's even worked to strengthen its entire apparel team starting at the top with Ken Mangone, EVP of product development and sourcing.
And along comes Billy
Ackman's saying some of the right things, including: "It's a great brand. It's been around a long time, but it has underperformed its peers, namely Kohl's (KSS) and some others, and I think it can be a better retailer."
But it's honeymoon time for the stakeholder and his newest toy. And no doubt, Ackman's patting himself on the back of his pinstriped jacket for his hard-won slice of JCP's pie. After all, he handily managed to elude SEC disclosure until his shares were secured.
And this comes on the heels of his getting stung on Target's (TGT) board after he tried to get the retail chain to spin off its property holdings into a REIT. Not only did Target's shareholders refuse, but Ackman's fund took a hit when the company's stock prices dipped. His own wallet got dinged in the process after he personally committed to add $25 million to the fund in order to pay back his investors.
What's troubling is that Ackman's push to diversify his portfolio has him all over the map -- and it's not a pretty picture. Remember when he called himself a "stuckholder" of Borders (BGP) as the bookseller's ship started to sink? He's owned pieces of Wendy's, Sears (SHLD), General Growth Properties (think shopping malls), a liquor company, a debt-laden co-op complex in Manhattan, and various and sundry other investments.
Bearing a REIT of roses
Even a casual look at all Ackman's holdings reveals he likes real estate. It's his father's business and even his mother-in-law is a broker. It's very likely that he'll try to steer JCP's board to consider examining the value of its properties, especially as he says,
This company will succeed or fail on the basis of how it does as a retailer. It helps that it has very valuable real estate assets and very low-cost real estate. Look at Forever 21. They're taking department store-size boxes now in malls and they're a traffic generator, so I think of them as an anchor. You can sell women's apparel and be very successful in the mall. One of the big lessons of the financial crisis is a lot of the more tertiary retail concepts, lifestyle centers, things like that -- they failed. Traffic still stayed in the mall and they're not going to build a lot more malls. The mall becomes a more dominant asset over time.
And that's the rub. Ackman's right about Forever 21's success in big box spaces. What he never mentions (because he's probably not aware) is what it takes to fill those spaces. Forever 21's built a formidable network of suppliers that can turn trendy threads out on a dime and allow stock to be refreshed almost daily. JCP's lead times are considerably longer. Not to mention its creative team is still learning how to manage all the latest e-commerce sites that will take the place of JCP's soon-to-be-defunct catalog business.
Steady as she goes
At best Ackman will be an agent of change, forcing the chain to refresh its entire approach to merchandising. At worst, he'll be a distraction from the business at hand. Real estate holdings won't mean much if customers aren't shopping.
Image via harborinvestmentconference.blogspot.com
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