Hedge fund manager Ackman says mistakes made in JCPenney turnaround

BOSTON (Reuters) – Hedge fund manager William Ackman said that Ron Johnson, the chief executive he handpicked to turn around JC Penney, has made “big mistakes” and the impact on the struggling retailer has been “very close to a disaster.”

The “criticism is deserved,” Ackman said on Friday of Johnson, a former Apple executive who has come under fire for his dramatic plans to overhaul the staid retailer with cost cuts, more fashionable merchandise and a new pricing strategy.

The stock price has plummeted 27.6 percent in the first quarter as Johnson’s plans alienated JC Penney’s core clientele and has not resonated with new shoppers.

“One of the big mistakes was perhaps too much change too quickly without adequate testing on what the impact would be,” Ackman said on Friday at an investment conference sponsored by Thomson Reuters.

After months of being a public cheerleader for Johnson, often saying that he was a doing a great job, the fund manager tempered his normally upbeat comments on Friday.

Speaking bluntly, Ackman, who sits on the JC Penney board and whose $12 billion Pershing Square Capital Management is the company’s largest shareholder, said big mistakes have been made remaking the 110 year-old retail brand.

JC Penney traditionally drew in customers with big sales and coupons but Johnson has been criticized for eliminating those in favor of every day low prices.

The company has now brought back their old pricing strategy to try to bring shoppers back.

Ackman said that Johnson faces one of the toughest challenges in corporate America in cutting costs and changing the merchandise and that “the impact has been, on a consolidated basis, very close to a disaster.”

Right now Johnson is “working very aggressively with his team to fix the mistakes that have been made, and there have been some big mistakes,” Ackman said.

JC Penney did not immediately respond to a request for comment.

JC Penney’s stock price climbed 3.3 percent on Friday to $15.57 in late afternoon trading.

Ackman, a favorite with pension funds and wealthy investors, has come under criticism for bets on retailers in the past, including bets on Target and bookseller Borders a few years ago. Currently Pershing Square is sitting on roughly $500 million in paper losses in JC Penney.

“If you get a retailer fixed and you can replicate it, it’s about the best way to make money,” he said.

While JC Penney’s losses are making headlines, Ackman’s portfolio gained 6.1 percent during the first quarter thanks to bets on Canadian Pacific Railway and Procter & Gamble.

In a nod to his ongoing commitment to JC Penney’s fortunes, the billionaire investment manager wore socks purchased at JC Penney.

HERBALIFE BATTLE

At the conference Ackman was also asked about his other high profile investments, including nutritional supplements company Herbalife on which Pershing Square has a $1 billion short bet, expecting the multi-level marketing company’s share price will move to zero.

The investment has been the talk of Wall Street in recent months as other well-known hedge fund managers, including Carl Icahn and Daniel Loeb, moved to the other side of the bet with long positions in Herbalife.

“Taking a short position and going public with it is a pretty serious business,” Ackman said. “Did I think a group of hedge fund managers would take the other side of the trade and try to orchestrate a short squeeze? No, I didn’t think that,” Ackman said.

Short-sellers borrow shares and sell them, seeking to profit by returning them after buying them back at a lower price. A short squeeze occurs when the share price rises instead, forcing the borrowers to try to buy them back at a higher price, thus pushing the share price even higher.

Talking about the public feud over Herbalife, Ackman said that the $2.25 trillion hedge fund industry, once close-knit where managers often worked collaboratively, now seems much more competitive.

“This was the first case where there was a lot of sniping going on between managers,” he said, referring to the recent backbiting over the Herbalife trade.

But he acknowledged that hedge fund managers can’t be overly sensitive. “You have to have thick skin to be in this business.”

(Reporting by Svea Herbst-Bayliss and Katya Wachtel- Editing by Phil Berlowitz)