All these poorly managed stores sitting on potentially valuable real estate. So, buy the company, bring in smart, young, innovative managers (just like us financial guys) pay them a wad (not quite like us financial guys) and they'll probably turn it around in no time. It can't be that hard to sell pants to Americans. And if they dont succeed, who cares? We can sell the real estate and still come out ahead.
Or so the narrative was supposed to go.
17 months ago, Willliam Ackman, a wealthy New York hedge fund manager (Harvard undergrad, Harvard MBA) ousted Mickey Ullman, JC Penney's long time CEO, a man who had spent his entire career in retail and replaced him with Ron Johnson, who created the Apple retail phenomenon. The thinking was that a really bright guy (undergraduate degree from Stanford, Harvard MBA) with that kind of experience he gained at Target and Apple could do this with his eyes closed. Which is not far from what happened as Johnson's family preferred living in northern California to moving to Plano, Texas where Penney is headquartered so Johnson commuted three days a week between the Bay Area and Plano. Not a bad part time gig, this being a Fortune 500 CEO. And hey, what could go wrong? Selling extremely expensive electronics is just like selling discount socks and underwear. Isn't it?
This would be an interesting story in itself were it not for the fact that this is the second New York area hedge fund genius who thought that retail looked like easy pickings. Edward 'Eddie' Lampert (Yale, Goldman Sachs) bought Sears and Kmart, which he merged based on the same general theory. That was in @2005. He's been through a platoon of CEOs and has even taken a couple of turns running it himself. The big payoff remains, shall we say, elusive.
There have been a few others, but not of comparable scale. The larger story appears to be that running a hedge fund is not a proxy for being a gifted business manager. Or an economic seer. Or even a notable investor. Oh, and that retail may seem dumb and basic to guys who worked on a trading desk at Goldman Sachs before going out on their own, but there's probably a reason why more people dont succeed at it. All of which is to say that in an increasingly segmented economy, there is very little that is obvious. Early career success may be instructive but it may also blind one to the pitfalls and complications of markets and enterprises outside one's own experience. Which is a useful, if somewhat expensive, lesson to learn the hard way. JL
Nathan Vardi reports in Forbes:
The fiasco at J.C. Penney will continue to put downward pressure on Ackman’s hedge fund returns, threatening to make 2013 the third straight year that Ackman will deliver to his investors returns that trail the U.S. stock market and a low-fee S&P 500 index fund, which has returned 10.61% so far in 2013.
William Ackman charges his investors rich fees for the privilege of parking their money at his Pershing Square Capital Management hedge funds. He made believers out of many, helping Ackman become a billionaire with over $12 billion under management. But for more than two years now Ackman has not lived up to his part of the bargain.
Starting in the fall of 2010 Ackman led a revolt at retailer J.C. Penney, directing his hedge fund to take a big stake in the company and working to oust CEO Myron Ullman and replace him with Ron Johnson, the former Apple retailing guru. The idea was to dramatically change J.C. Penney and even after signs emerged that things were not going well Ackman boldly predicted that a Johnson-led J.C. Penney would make him 15 to 20 times his investment over a period of years. But on Monday J.C. Penney’s board decided to dump Johnson and bring back Ullman, leaving investors bewildered. The stock sunk by 11% in Tuesday morning trading and is now down 29% for the year.
At the end of March, Ackman’s hedge fund had posted a net return of 6%. At least one prominent investor in Ackman’s hedge funds, George Soros, reportedly has seen enough and is asking to withdraw a chunk of his cash managed by Pershing Square.
At the same time, Herbalife, the stock Ackman is shorting to the tune of $1 billion, is up slightly so far in April and 19% in 2013. Ackman’s funds made paper gains betting against Herbalife last year, but not enough for Ackman’s funds to beat the U.S. stock market, even after Ackman conducted a short promotion on a New York City stage. With support of Ackman’s nemesis, Carl Icahn, Herbalife’s stock has staged a big rebound this year that has dinged Pershing Square’s returns. In sum, Ackman’s paper gains on the short didn’t help him beat the U.S. stock market last year and the stock’s reversal is hurting Ackman this year. Ackman got something of a gift on this position on Tuesday, when Herbalife announced its auditor, KPMG, was resigning because KPMG’s lead partner working on Herbalife’s books had been involved in insider-trading, compromising KPMG’s independence. KPMG withdrew three years of Herbalife’s audited financial statements, leaving Herbalife with the uncertainty associated with finding a new auditor. Still, after all that, Herbalife’s stock was halted for most of the morning and then fell by a mere 1%.
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