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Thank goodness that's over. Bill Ackman has quit the board of J.C. Penney Co. Inc. in what appears to be a resolution to the nasty public row that erupted last week at the U.S. department store chain. In return for the exit of the activist investor, who had unsuccessfully called for the ousting of both the chief executive and the chairman of the retailer, J.C. Penney has recruited a veteran of the industry, Ronald Tysoe, to join the board. It says it intends to name another "highly qualified" director soon. The dispute had threatened to be a distraction at a critical time for retail. It is back-to-school season, which will be quickly followed by the holidays. Now, thankfully, everyone can focus on the business. Still, shares of J.C. Penney, with a market capitalisation of about $3-billion (U.S.), dropped 3 per cent on Tuesday on the news.
One worry is that a scorned Mr. Ackman will sell his holdings – 18 per cent of common shares plus derivatives. Another is simply the state of J.C. Penney itself, a mid-level U.S. retailer that has fallen into a tailspin. Sales dropped by a quarter to $13-billion and losses ballooned during the last fiscal year as an effort to revamp the strategy under former boss Ron Johnson – who was installed by Mr. Ackman then ousted in April – failed to attract new customers as fast as it alienated the old ones. In its first quarter ended in May, the company had negative free cash flow of nearly $1-billion. It has borrowed $2.3-billion and said it expected to have $1.5-billion of cash at the end of the second quarter.
Retail product cycles have lead times of at least six months. That means it takes a while for a company to respond to customers and restock shelves with the merchandise they want. J.C. Penney is not just combating internal problems. There are also big-picture trends, such as intense competition, the internet and mixed spending patterns, especially for lower-income shoppers. J.C. Penney's management and the board have solidified their leadership, but now they must prove their mettle. Progress on a turnround must come quickly. A new fight is just beginning.