August 27, 2013 9:24:48 AM
NEW YORK -- J.C. Penney's largest investor and former board member is bailing out.
William Ackman of Pershing Square Capital Management is selling his nearly 18 percent stake, or 39.1 million shares, in the struggling retailer, according to regulatory documents filed late Monday.
The move comes two weeks after Ackman resigned from J.C. Penney's board as part of a deal to resolve an unusually public battle between the activist investor and the struggling department store operator.
The news sent Penney shares down nearly 3 percent to $13 per share in after hours-trading after closing the regular session down 15 cents to $13.35. Penney's shares have lost nearly 70 percent of their value since early February 2012 when investor enthusiasm over former CEO Ron Johnson's retail strategy pushed the stock to around $43. That includes a 36 percent drop in value so far this year.
Some analysts say they were surprised by Ackman's plan to sell his shares so quickly.
"I didn't expect it to be so fast, but I can understand that he wants to put it behind him," said New York-based retail consultant Walter Loeb.
Belus Capital Advisors CEO Brian Sozzi agreed noting, "(Ackman) wants to cut bait and move on to something else."
Citigroup, the sole underwriter of the shares, will be shopping the stock around to prospective buyers. A price range wasn't revealed in the prospectus.
Ackman's sell-off comes as the beleaguered chain is trying to recover from a botched transformation plan spearheaded by its former CEO that led to disastrous financial results. The board ousted Johnson in April after only 17 months on the job and rehired Mike Ullman, who had been CEO of the retailer from 2004 to late 2011.
Ackman resigned from the board on Aug. 13, after he went public with statements saying he'd lost confidence in Penney's board and that Chairman Thomas Engibous should be replaced. Ackman and the retailer's board also were bickering over how quickly the company should replace Ullman, who is expected to be an interim CEO.
Ackman initially purchased a stake in J.C. Penney in 2010. He joined Penney's board in February 2011 and had pushed the board to hire Johnson, a mastermind of Apple Inc.'s successful stores. Under Johnson's leadership, Penney got rid of most sales in favor of everyday low prices. He also brought in hip new brands and planned to remake the store as an indoor mini mall of sorts with 100 different in-store shops in an effort to woo trendier, more affluent shoppers. But those efforts alienated Penney's loyal customers.
Penney ended up recording nearly $1 billion in losses and a 25 percent drop in revenue in the fiscal year that ended Feb. 2, the first year of the transformation plan. Since returning to Penney's helm, Ullman is bringing back basic merchandise like loose-fitting khakis and restoring frequent promotions. But sales declines and losses continued into the first and second quarters as Johnson's legacy continued to cast a shadow on the results.
In the three-month period that ended Aug. 3, Penney lost $586 million, or $2.66 per share. That compares with a loss of $147 million, or 67 cents per share, a year earlier. Revenue was $2.66 billion, down 12 percent from $3.02 billion. Analysts were expecting a $1.07-per-share loss on revenue of $2.77 billion.
Penney offered some encouraging news in the second-quarter report: revenue improved from month-to-month, and the decline in Penney's online business slowed significantly. The chain also said it saw a good start to the back-to-school shopping season. But Loeb and other analysts believe that Penney's business won't show signs of stabilization until the fourth quarter.
In a letter to investors last week, Ackman said that his investment in Penney was a "failure" and that retail "has not been our strong suit."
Ackman's Pershing Square Capital Management invests in and bets against a wide range of businesses, including McDonald's Corp., insurance company MBIA Inc. and Canadian Pacific Railway Ltd. But Ackman has been particularly vocal about his dealings with Penney lately as the department store struggles to turn around its business. In the letter to investors last week, Ackman said it was "difficult to determine" how long a sales recovery might take. However, he did not hint what he planned to do with Pershing's stake in the retailer.
Last Thursday, Penney adopted a plan to prevent a takeover attempt though it said there is no current attempt to take over the company. However, the so-called "poison pill" can be put into effect if an individual or an entity acquires 10 percent or more of the company's outstanding stock. Belus analyst Sozzi noted that Penney appeared to be getting ready to prevent any possibility of a big investor buying a big block of shares.
Penney and Ackman have set terms to allow him to unload his stake in the company in an orderly manner. Pershing Square Capital can make up to four requests to the company to register the sale of his shares. Each request must be for at least 5 million shares and the deal terminates when he owns less than 5 percent.
Penney will not receive any proceeds from the sale of the shares.