J.C. Penney Company (JCP) has had a rough couple of years as it continues to face cash flow issues, and numerous analysts have questioned its ability to stay afloat. Now, it looks like JCP stock will be facing even heavier selling pressure, following the news that accredited investor Bill Ackman of Pershing Square Capital will be selling his shares in JCP. JCP's most recent SEC filing (listed just after the market close on Monday August 26) shows that 39,075,771 shares are offered for sale, which represent 17.7% of JCP's entire float. Ackman had purchased JCP shares at an average cost of around $25, and this thus represents a substantial loss for Ackman and his hedge fund (around half a billion dollars with the current price of JCP being around $13).
Judging from JCP's afterhours trading activity on Monday, it is clear that stockholders were not pleased with the news that Ackman would be intending to sell. But for those paying attention, the news could hardly be considered surprising. Ackman was quite open about the investment in JCP being a mistake and had obviously misjudged its potential. In fact, as recently as one week ago, Perishing Square in their latest Q2 letter had indicated that they may be deciding to sell their JCP stake in the near future. Regarding JCP, the following was stated:
After our failed proxy contest at Target, we held our investment for more than 19 months until the price rose to a level where we found better uses for capital. We may choose to exit J.C. Penney after more or less time depending on developments at the Company, the stock price, and the availability of other investment opportunities.
Of concern to JCP stockholders now is not merely that Ackman has seemingly lost faith in JCP's investment potential, but that the selling of such a large volume of shares (39,075,771) will put substantial selling pressure on JCP, potentially causing the stock to drop further. One can only guess the time period over which Ackman will be unloading his 39,075,771 shares. But with the average trading volume for JCP currently being around 10 million shares, selling such a large position would likely need to take place over the space of several months.
For those who intend to hold JCP shares amidst heavy selling, there are a number of considerations that should be taken into account after Ackman unloads his entire position:
- It may be speculated that in addition to the poor investment performance of JCP, a major influence for Ackman selling JCP was his recent disagreement with the board of directors regarding the search for a new CEO, coupled with his previous mistake of introducing Ron Johnson as JCP's CEO months earlier, under which JCP faced immense problems. Ackman had resigned from the board on August 13, and now that he is selling his entire JCP position, he will have no further influence on the direction JCP takes from here. Ackman made no positive contributions to JCP during his time as a stockholder, and JCP will now be able to continue without his influence. In the near term this means that the current JCP CEO (Mike Ullman), who Ackman was attempting to remove, will likely stay on for some time.
- It is no secret that JCP's business has been declining, with recent quarterly sales of $2.66 billion falling below analysts' estimates, and a quarterly loss of $586 million causing further cash burn. While much of JCP's current plight has been attributed to the mistakes of past CEO Ron Johnson, it is difficult to see what could be in store from JCP's current CEO Mike Ullman that will allow it to eventually return even close to profitability. A few recent initiatives that have been praised (such as buying back JCP's private brands which offer higher margins) have not changed the reality that JCP appears to be a dying business. In the several months since Ullman stepped in as CEO, JCP's cash burn remains serious.
- JCP's recent $2.25 billion term loan arranged by Goldman Sachs would barely allow JCP to carry on for one more year at the current rate they are burning through cash. And as the loan is secured by tangible and intangible assets of JCP, the proceeds of any sales of JCP's assets over a certain amount will have to go straight back into paying the loan back, rather than used for business operations.
- The current retail environment and economic conditions for JCP's target customers are currently not particularly promising, as we can see that JCP's major competitors such as Macy's (M) and Wal-Mart (WMT) are also struggling in recent earnings reports.
Given that the future of JCP is extremely uncertain and the stock may now face substantial selling pressure, it is very possible that JCP stock will continue its downward descent in the coming months. I would only consider it as a reasonable investment if earnings are able to improve next quarter and some positive catalysts emerges to keep it afloat for longer.