J.C. Penney Co. Inc.’s management may have lost the support of investors William Ackman and Richard Perry, but the retailer still has the financial support of factors and credit analysts — at least so far.
The cash burn rate is what seems to be fueling the summer of discontent among board members and investors at Penney’s. The latest crisis began July 31 on rumblings that factoring firm CIT had stopped approving shipments for orders scheduled to be shipped in January. In reality, CIT had simply delayed final approval on orders pending additional information from vendors on certain orders.
Factors who were in the office on Friday said they continued to support Penney’s. Credit sources said they are unaware of any firm that has stopped supporting the retailer at this time.
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That must be a glimmer of good news for Penney’s as its boardroom battle continued to rage Friday. Perry of Perry Capital Management joined the brawl as a new antagonist, siding with Ackman of Pershing Capital Management, which holds a 17.7 percent in Penney’s. Perry is also the owner of Barneys New York.
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In a regulatory filing Friday with the Securities and Exchange Commission, Perry disclosed he acquired a 7.3 percent stake in Penney’s, or 16 million shares, beginning on June 12 and ending on Aug. 1. The purchase prices ranged from a high of $18.02 to a low of $14.58, with the average in the $16.30 range.
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Shares of Penney’s fell 5.8 percent to close at $12.87 in trading Friday. Given Friday’s closing price and the average purchase price, Perry has a paper loss on his investment that is north of $55 million.
In the same SEC filing, Perry disclosed a letter he sent to Penney’s board pushing for a faster resolution to the retailer’s search to replace interim chief executive officer Myron “Mike” Ullman 3rd. He also supported Ackman’s idea of Allen Questrom returning to the Penney’s fold as chairman.
In his letter, Perry wrote: “Shareholders and creditors have increasingly lost confidence in the company, as evidenced by the recent significant decline in the company’s stock and bond prices. This market reaction is particularly alarming given the company’s meaningful improvement in liquidity following its $2.25 billion term loan financing. We strongly urge the board to take immediate and proactive steps to improve the financial and operational management of the company.”
He added that he “would be very supportive of a return to the company by Allen Questrom and Ken Hicks. While we appreciate Mike Ullman’s willingness to assume the interim ceo role at a critical juncture, we believe it is imperative that the board promptly establish a board and management structure that provides the company the greatest chance for success.”
Perry cited a research note by Citigroup broadlines analyst Deborah Weinswig in which she referred to a management duo of Questrom-Hicks as the “dream team.” Questrom was the former ceo of Federated Department Stores, Barneys and Ullman’s predecessor at Penney’s during Ullman’s first tour of duty at the retailer. Hicks, chairman and ceo of Footlocker, was the president and chief merchant at Penney’s under Questrom and later Ullman.
Weinswig noted that both Questrom and Hicks have “turnaround experience at several retailers and could be a ‘dream team’ to right the ship at [Penney’s].”
“Given the urgent nature of the situation, I am releasing this letter publicly so that other shareholders who feel the same way can express their opinions directly to the board,” Perry concluded.
Michael Neus, general counsel at Perry Capital, did not return a request for comment.
The discontent among Penney’s board members came to light Thursday when Ackman publicly disclosed his second letter to fellow board members, after discerning that a “small subset of the board” is speaking on behalf of the full board without input from all directors.
Thursday’s letter, while noting that Questrom would be willing to return as chairman provided certain conditions are met and he approves of the new ceo hire, was essentially a public push to get the board to fast-track the ceo selection process. The board, via chairman Thomas Engibous, fired back, stating that Ullman has been doing a good job and that the board “disagreed” with Ackman’s points of contention.
That prompted Ackman to send a third letter Friday, this time seeking a meeting with the Penney’s board to consider the ouster of Engibous as well.
In response, Engibous said Friday: “The board is focused on the important work of stabilizing and rejuvenating the business. It is following proper governance procedures, and members of the board have been fully informed and are making decisions as a group. This includes the ceo search process, which is being conducted at an appropriate pace. The board also continues to actively oversee management as it conducts the important work under way to rebuild the company.”
Engibous concluded with: “Mr. Ackman’s statements are misleading, inaccurate and counterproductive.”
Among the new disclosures in Friday’s missive, Ackman specifically pointed the finger at Ullman, noting that upon his return he fired consultants Alix Partners and “cut off Blackstone [Group] from access to information and a role in assisting us in analyzing the current state of affairs.
“It was entirely inappropriate for Mike to terminate the board’s advisers without the board’s knowledge or consent. We are now flying blind,” Ackman wrote, stating that the two firms were board hires to help the company control cash, expenses and future commitments.
He detailed some of the steps that Ullman has taken since replacing former ceo Ron Johnson — who was handpicked by Ackman to shake up the retailer — and even noted that he didn’t know of Debra Berman’s hiring last week as the new marketing chief.
“Imagine my surprise when I learned of Ms. Berman’s hiring from a press release on my Bloomberg machine,” Ackman wrote.
On Engibous, Ackman wrote that the “board must be led by a chairman who is unbiased, can make decisions without regard to personal relationships, and focused only on what is best for the corporation.”
“In recent weeks, our board has ceased to function effectively,” he claimed, adding, “I have lost confidence in our chairman’s ability to oversee this board. I would therefore recommend that Tom be replaced as our chairman.”
As for the financials, Ackman disclosed, “We received three different financial projections — a new one at each of the last three board meetings — each one projecting worse results than the previous one. Most disconcerting was Mike’s disavowal of the first two projections when he explained at the last meeting that those were not ‘his numbers.’ I find this particularly troubling because these projections were presented by Mike himself to the board in May and in June so it is hard for me to understand why he should not have ownership for May and June’s projections.”
The deepest criticism was aimed at Ullman, whom the activist investor said provided the “analyst community with false information,” telling them that “he was not the interim ceo, but the board’s long-term choice.”
He also said he was troubled by the “aggressive inventory purchases and future commitments” for later this year and 2014, and that there are vendor concerns that Penney’s has been buying too much stock. “In my opinion, Mike is overly optimistic about the near-term future of the [company.] This vendor recommended, and I agree, that [Penney’s] should be making only conservative inventory commitments and then chasing inventory in the event we sell beyond our projections.”
Ackman said he pushed for public disclosure of the ceo search since it would likely leak out anyway, and because announcing the “process would keep the board focused on getting the search done promptly.”
Ackman even went on to defend his actions by noting the public disclosure was the right thing to do as a fiduciary for the company and its shareholders. “Sometimes being ‘disruptive’ is exactly what a company and board needs at a critical time,” he emphasized.
On Friday, Howard Schultz, ceo of Starbucks, stepped into the fray. During an interview on CNBC, Schultz accused Ackman of doing damage to Penney’s. Ullman is on the board of Starbucks.
Given the points raised by Ackman, the Aug. 20 second-quarter earnings release from Penney’s for the period ended July 27 is likely to provide much needed clarity on the retailer’s financial position. One factor said Friday that the report is “not expected to be positive.” The factor expects a cash burn of between $600 million and $800 million for the first half of the year.
Weinswig said in Friday’s research note, “The business is deteriorating and we were surprised when the company published a press release Aug. 1 [that they would end the quarter] with only $1.5 billion in cash despite recent efforts to improve their balance sheet.”
A credit analyst said Penney’s true financial picture can’t be assessed until it’s known how much availability is left on credit lines.
For now, credit professionals are still supporting Penney’s because, when deciding whether or not to approve orders, they tend to look at the availability from a short-term basis. The current view is that there’s ample cash liquidity to at least get through the holiday season.