Bill Ackman and J.C. Penney May Both Be Wrong

The troubled retailer and one of its biggest investors engaged in a verbal sparring match this week.

Shoppers enter a J.C. Penney department store in Dallas in 2005.
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Who needs trashy daytime talk shows? Turn on CNBC today to catch up on one of the most engaging squabbles of the year (and maybe learn something about business strategy). J.C. Penney and one of its key investors are trading barbs over company leadership, and the blows and counterblows are dizzying. And both parties may need to change their thinking if they want what is best for the company.

The latest trouble began when Bill Ackman, a J.C. Penney board member and manager of a hedge fund that owns an 18 percent stake in the company, demanded in a Thursday letter that the company replace interim CEO Mike Ullman. Ackman then on Friday added that he believes the board should meet immediately and replace Chairman Tom Engibous with Allen Questrom, who served as J.C. Penney's CEO from 2000 to 2004. Ackman also threatened to sell his firm's shares of J.C. Penney.

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The board, meanwhile, fired back Thursday in a statement, with Engibous defending Ullman, who took the helm in April 2013.

"Mike has led significant actions to correct the errors of previous management and to return the Company to sustainable, profitable growth," Engibous said, adding that the board "strongly disagrees" with Ackman.

The fight is made all the richer with the history that these players share. Ackman, for example, already has helped to push Ullman aside once, when in 2011 he pushed to replace Ullman with Ron Johnson, a retailing guru from Apple.

Meanwhile, Questrom and the board have their own issues. Questrom, who is considering taking on the role of chairman, has in the past questioned the board's decisions and this week blasted them on CNBC.

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"I do think there's something missing from the board if it takes them this long to come up with a successor," he said. Ullman, himself the company CEO from 2004 to 2012, replaced Johnson as interim CEO in April. The board said in its statement that they have now been searching "in earnest" for three weeks.

When asked about whether he could return and work with J.C. Penney's board, Questrom sounded uncertain. "I would have to feel comfortable that I could work with them, and they'd have to be comfortable that I could be helpful."

The controversy is sending J.C. Penney's year from bad to worse. The company posted a $348 million loss in the first quarter of 2013, the retailer's seventh straight quarterly loss, according to the Wall Street Journal.

Paul Argenti, professor of corporate communication at Dartmouth College's Tuck School of Business, believes, as does Questrom, that the time is beyond ripe for bringing in a new CEO. He also believes the board may want to consider bringing in fresh blood and stepping away from its recent strategy of bringing in retailers and its own former CEOs.

"You don't need someone who was a retailer in a different industry, and you don't need someone who's been in retail," Argenti says. "You need someone who can really think about the strategy."

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He pins some of the company's recent flails on the board. As CEO, Johnson's strategy involved bringing in more upscale goods and eliminating constant promotions. That tactic famously failed, contributing to a sales decline of 25 percent.

"This is a company in search of direction. They have zero idea what they want to do and who they want to be," he says.

In that sense, he says, Ackman may be right in his hurry to find new leadership. However, the board may also have good reason to fire back at him. In brashly bringing his complaints public instead of quietly to his fellow board members, Ackman may have also further endangered the company. As Yahoo! Finance reported this week, more uncertainty could be bad at a time when J.C. Penney's ability to borrow is already reportedly at risk. U.S. News has not yet received a comment from Pershing Square Capital Management, the hedge fund Ackman founded.

Regardless of who is right, the company does have room to right itself, says one marketing expert. J.C. Penney is having troubles, but "that doesn't mean department stores in general aren't. Macy's is doing very well," says Barbara Kahn, director of the Jay H. Baker Retailing Center at the University of Pennsylvania's Wharton School of Business. J.C. Penney occupies a unique niche, she says, as a department store appealing to a slightly lower-income and older audience than stores such as Macy's. Aiming squarely at bringing back that audience will be necessary, she says, but the company may have to do it quickly.