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The Science of Hitting
The Science of Hitting
Articles (447) 

Ron Johnson - Fired from JCP

April 08, 2013 | About:

After the close, some big news hit the wire from J.C. Penney (NYSE:JCP) – from the press release:

The Board of Directors of J.C. Penney Company, Inc. today announced that Myron E. (Mike) Ullman, III has rejoined the Company as Chief Executive Officer, effective immediately. He has also been elected to the Board of Directors. Mr. Ullman is a highly accomplished retail industry executive, who served as CEO of jcpenney until late 2011. He succeeds Ron Johnson, who is stepping down and leaving the Company.

Thomas Engibous, Chairman of the Company’s Board of Directors, said, “We are fortunate to have someone with Mike’s proven experience and leadership abilities to take the reins at the Company at this important time. He is well-positioned to quickly analyze the situation jcpenney faces and take steps to improve the Company’s performance.”

Mr. Ullman added, “While jcpenney has faced a difficult period, its legacy as a leader in American retailing is an asset that can be built upon and leveraged. To that end, my plan is to immediately engage with the Company’s customers, team members, vendors, and shareholders, to understand their needs, views, and insights. With that knowledge, I will work with the leadership team and the Board to develop and clearly articulate a game plan to establish a foundation for future success.”

Mr. Engibous added, “On behalf of the Board of Directors, we would like to thank Ron Johnson for his contributions while at jcpenney and wish him the best in his future endeavors.”

This is a huge blow, and far from good news. Clearly, the board decided that “Home” would not be do or die for Johnson as I recently assumed – the pricing disaster was enough to end his short tenure as the CEO of JCP (assuming early shops data is in-line with previous reports). This leaves plenty of questions to be answered – none of which are adequately addressed in the press release. The company’s plan from this point on is anybody’s guess; strategically, I have no idea what lies ahead for JCP.

As noted in the proxy from a few days ago, Mr. Johnson never entered into an Executive Termination Pay Agreement at JCP; he will walk away from the company with less than $150,000 – the majority of which is simply part of a non-qualified defined contribution plan.

I really have to question the thinking by the board; if this is the conclusion, why wasn’t it made PRIOR to investing in initial construction for the most significant piece of Mr. Johnson’s vision? I’m truly flabbergasted by the timing. I’ll have more to say once we get some additional color on what management plans to do from this point forward; I continue to hold my position in JCP.

About the author:

The Science of Hitting
I'm a value investor with a long-term focus. As it relates to portfolio construction, my goal is to make a small number of meaningful decisions a year. In the words of Charlie Munger, my preferred approach to investing is "patience followed by pretty aggressive conduct". I run a concentrated portfolio, with a handful of equities accounting for the majority of its value. In the eyes of a businessman, I believe this is sufficient diversification.

Rating: 4.5/5 (12 votes)


Swnyc2 - 4 years ago    Report SPAM

I, too, am disappointed at the timing of this decision. It makes me wonder whether the board has additional, material information about how the new shops are doing, which they haven't disclosed. Or, if they have material information about the lawsuit, which they haven't shared.

The problem for me is that Johnson and his vision of reinventing the retail experience was a big reason I bought the stock in the first place. Now that he is gone, I no longer have a reason to own the stock. Apparently, others feel the same way as the stock has tanked in after hours trading.

It's a tough call as to what one should do now. My main reason for purchasing the stock (namely Johnson's retail vision) is gone. So for me, I should probably sell, since I don't believe Ullman is going to come up with a successful turn around plan. The only reason for me not to sell now is if the real estate value really puts a solid floor under the current stock price. In which case it might make sense to wait a bit until sales stabilize.

Do you have a quantitative opinion as to JCPs real estate value?


Aagold - 4 years ago    Report SPAM
It could be that the first two months of Q1 2013 were showing continued deterioration from Q4 2012 and the Board just couldn't take any more pain. I was guessing that Johnson had a couple of more quarters to show that his shop strategy could turn things around; the fact that the board moved this quickly suggests that things were getting even worse in Q1.

I can't believe Ackman agreed to have Ullman come back as CEO. That just seems like adding insult to injury (i.e., after having to fire his hand-picked CEO so quickly). Man... what an unmitigated disaster for Ackman. Why on earth would anybody believe that Ullman would be able to fix things at this point?

- aagold
The Science of Hitting
The Science of Hitting - 4 years ago    Report SPAM

In terms of real estate value, I don't have much to add beyond what I've wrote in the past ("Property" section from most recent article on JCP); time will tell what the company does with the asset base...


It very well could be, and there's no assurance that the shops strategy is abandoned at this point; my point is that if you have any inclination of letting him go before the "Home" launch is complete, then maybe you should think about how much time/money you're going to put into that launch.

I'll wait to hear what Ullman proposes before I conclude on his ability to right the ship at JCP.

Thanks for the comments!

Luishernadez premium member - 4 years ago
I think the real estate value definitely holds at current prices. I think it is worth a lot more than the current mkt cap of JCP.

I hope that with the decision to fire Ron Johnson (which I don't think makes any sense) they decide to spin the real estate into a REIT or something of the sort and start liquidating or drastically reducing the retail operation.

Varunfriend premium member - 4 years ago

Lesson to learn:

When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.

I wouldnt be surprised if JCP falls from here. A better way to try to acquire the stock is sell puts at value of the real estate per share. I havent been able to get to that number, so i'll probably stay away until I can get a believable estimate for that.

Waup7707 - 4 years ago    Report SPAM
Well, "Turnarounds" seldom turn. Even Buffett couldn't turn around Berkshire textile business and he admitted that acquiring Berkshire is the most costly mistake in his investment career.
Mla - 4 years ago    Report SPAM
Yes, I'm planning to sell as well.

And I too wonder what the board was thinking. Firing Ron is a big blow, but then re-instating Ullman?

If they really believed Ullman could stabilize things, I think they should have introduced him as a temporary co-CEO. He would manage the existing stores and get revenues stabilized while working with Ron to build out the new concept

Oh well.
Seattle Ethan
Seattle Ethan - 4 years ago    Report SPAM
Buffett actually owned a department store, which only gave him headaches for years. WSJ reported some Private Equity/Hedge Funds were interested in buyout, but that's pure speculation at this point. I wonder if the board is doing what they think is best for JCP or to protect their own bottoms. As we have seen with BAC and others, boards have been sued.

This way, the board could at least say, hey we tried to fix it.
Vgm - 4 years ago    Report SPAM
It surprises me not in the least. As I've said before, much of what our Guru Mr Ackman touches turns to dust. King Midas in reverse.
The Science of Hitting
The Science of Hitting - 4 years ago    Report SPAM

"It surprises me not in the least. As I've said before, much of what our Guru Mr Ackman touches turns to dust. King Midas in reverse."

Through the first quarter of last year (most recent letter I can find) Pershing Square was up more than 410% (net of fees) since inception in 2004, compared to a return of less than 50% for the S&P 500 over that same time period. Pershing Square's returns have been quite attractive under Bill Ackman's control.
Vgm - 4 years ago    Report SPAM
SoH - thanks for the info. Can you provide a link? It seems much of what he's done of late has been an unmitigated disaster. I think the numbers you quote will likely come down big time. He's absolutely not on my personal Guru list.
Buynhold - 4 years ago    Report SPAM

Ackman's Gotham Partners venture (before he got a new start at Pershing Square) was a failure. We can't just ignore that.

Given that, I have no idea whether he is a much improved investor, or just plain lucky so far.
Ec1257 - 4 years ago    Report SPAM
His Gotham Partners venture seems to have failed becuase of illiquid investments/redemptions. The assets he sold to Icahn, turned out to be worth much more. His investors should have given him more time and let the thesis play out.

CP is supposed to be his biggest investment. Look at how that has performed.

JCP had bad execution, and now we will not likely know if Johnson's strategy would have succeeded..maybe like the Gotham limited partners, the board/investors/public should have given Johnson and his strategy a little more time


Waup7707 - 4 years ago    Report SPAM
The game in the money management business is that if your fund under-performs many years, you can just liquidate and close the fund, then the bad records are buried. Soon after, the manager opens a new shop and he may try very risky "investment" to hit it big, anyway it's other people's money, so there is only upside and no downside.

He may run a fund that "speculates" on only one company like Target and holds the "investment" mainly through out-of-money call options. Or he may "invest" big in CDS swaps to time when a bubble will burst. If the "investment" worked out, the manager would be the master of the universe and became a billionaire.

The disastrous performance of John Paulson's funds following blow-out returns of 2008-2009 is very telling of gambling mindset of hedge fund industry.
Buynhold - 4 years ago    Report SPAM

So Ackman's successes are due to his genius, and his failures can be blamed on investor impatience or bad management by investee companies, is it :)?
Shaved_head_and_balls - 4 years ago    Report SPAM
The real estate value is bogus. There is a huge excess of retailing real estate in America with more to come because of mergers (OMX/ODP), right-sizing overbuilt franchises, and the shift to warehouses (Amazon et al.).

Maybe JCP can sell some key locations for a good price, but if they try to dump the majority of locations you'll see how little that real estate is really worth.

The JCP turnaround concept was one of the dumbest ideas in history. Ackman should stick with stock picking rather than acting as puppet master for businesses he doesn't understand. In stock picking, a hedge fund manager can get rich with a long string of luck. In running a business, experience matters more than naive, grandiose schemes.

Ackman's prediction of stock returns of 15-20 times his investment in JCP should shake up investors in his Fund. That statement will haunt him for the rest of his career. It might be the most absurd prediction since a couple of book-peddling jokers famously predicted Dow 36,000 near the peak of the 2000 bubble.

You should hope no recession occurs in the next year or so or you'll see JCP stock in single digits, perhaps low single digits.
Vgm - 4 years ago    Report SPAM
"Ackman's prediction of stock returns of 15-20 times his investment in JCP should shake up investors in his Fund. That statement will haunt him for the rest of his career."

Agreed. And we shouldn't forget the other part of his claim at the time, handpicking Ron Johnson as "the Steve Jobs of retail". Ackman has stumbled from one major disaster to another in recent years. Incompetence is the word which comes to mind.
Cogitator99 - 4 years ago    Report SPAM
Unless you guys have 20% CAGRs over a long period of time, I don't think you're qualified to pass judgment on Ackman as an investor.

True that he has made high-profile bets that have unperformed in recent memory, but that doesn't make him a bad investor per se. What matters is the long-term record and he has a very decent one.

I remember when Bruce Berkowitz was the idiot du jour when AIG tanked. Plenty of people piled in to criticize him then. Now that FAIRX has come back, no one seems to be talking about it -- or at least not with the same intensity.

Not implying that JCP will be like AIG at all -- just making the point that every now and then great investors stumble. It doesn't mean they've turned into idiots overnight.
Buynhold - 4 years ago    Report SPAM
>> Unless you guys have 20% CAGRs over a long period of time, I don't think you're qualified to pass >> judgment on Ackman as an investor.

Really? You need that just to look at an investor's past record and see how he has performed?

>> What matters is the long-term record and he has a very decent one.

I have no idea if Ackman is good or not; what I am asking is, why are you ignoring his failure at Gotham Partners, and only looking at his Pershing Square record (which is good)? Combine the two, and then see how he has performed overall. You don't need 20% CAGR to be able to do that.

Waup7707 - 4 years ago    Report SPAM
>> Unless you guys have 20% CAGRs over a long period of time, I don't think you're qualified to pass judgment on Ackman as an investor.

Many investors, especially professional, know how to play number games to fool themselves and fool others.

If I can cherry-pick the start and end points of my 5 year performance periods, I can show you I achieved CAGR north of 28% for one 5 year period. Furthermore, if I could remove some of my bad or disastrous investments from my portfolio something like money managers closing under-performing funds, I would be able to brag truly astounding CAGRs for 10 year or even longer periods.
20punches - 4 years ago    Report SPAM
Ackman is not perfect and he, like other great investors, makes mistakes as well. However, because his active investment approach, his investment mistakes or investments that have not played out as expected yet, got magnified due to the public attention. Did anyone have heated comments towards David Einhorn about his investment in Marvell or Martin Marietta Materials when those two went against him temporarily?

Take a look at "Is MBIA Triple A" and watch the full presentation on "Herbalife", you don't have to agree or disagree with his opinion but if you can come close to the level of his analysis, you may judge him, irregardless of your CAGRs. But if you solely base your judgment on public perception, you should think twice.

Waup7707 - 4 years ago    Report SPAM

I am not judging Ackman or Paulson or any "great" fund manager. My opinion is about the entire money management industry.

I believe Buffett has strong doubt that funds (especially hedge funds) can out-perform no-brain index for long period of time. Buffett's Million-Dollar-Bet, 10 year stock market wager of S&P 500 index fund vs 5 funds of hedge funds (fees on top of fees), is pulling ahead at five year mark. I guess the five funds of funds picked by Protégé Partners are cream of the crop.

In addition, the gambling mentality of the hedge fund managers ...

20punches - 4 years ago    Report SPAM

I don't mean to offend anyone and I agree that the asset management industry as a whole is not creating much value. To quote Charlie Munnger, "If you're in a miasma of competition -- and to use the word that is so popular, greed -- and you attract very competitive people and they're thrown into this miasma, of course there's going to be more regrettable behavior than you might find in a monastery. Or at least than we thought we'd find in monasteries before we understood them better."[/color]
Waup7707 - 4 years ago    Report SPAM
Actually, asset management industry as a whole destroys value. According to Bogle's research, over 15 years period, 85% of stock mutual funds lags S&P 500 index after all fees and expenses. I don't think funds of hedge funds with big fees on top of huge fees will do better than mutual funds.

It's very sad that an eminent profession with so much talent and brain power going into it has produced negative results (compared to no-brain index) for the society.
Shaved_head_and_balls - 4 years ago    Report SPAM
Warren Buffett was asked recently if there were any hedge fund managers that he admired. He gave only one name after searching for an answer: Seth Klarman. He did not name Ackman, even though he obviously knows who he is because of Ackman's regular appearance in the media. After Gotham, JCP, Herablife, etc., it's unlikely that Ackman will come to Buffett's mind the next time he is asked that question.

Even a 10-year track record is meaningless. Any fund manager who concentrated heavily in commodities 10 years ago has trounced the market. Sometimes lucky speculation is hard to see in the investment world, which is why a number of average men and women have become rich beyond imagination in the investment Lotto industry.

Ackman is a great public speaker and maintains his composure under stress. Maybe he's a great investor too. It's too soon to tell. So far his record seems mixed, at best.

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