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J.C. Penney Takes Another Hit

Thursday - 3/7/2013, 2:00am  ET

My brain is starting to cement J.C. Penney and margaritas together in my thoughts -- whenever I hear either term, I think, "On the rocks." Yesterday's bad news came from two sources. It's been reported that investment fund Vornado has sold off a massive chunk of its J.C. Penney holding. According to The Wall Street Journal, Vornado is dumping 10 million shares, and cutting its losses. That has been the main driver behind the stock's 10% midday fall.

On top of that, yesterday the justice overseeing the Macy's , Martha Stewart Living , and J.C. Penney litigation mess said that J.C. Penney may not ever be able to put Stewart's items on the shelves. The retailer has pressed ahead with the promotion and launch of the line, even as it's being sued by Macy's to stop the partnership. Judge Jeffrey Oing said that he may put the brakes on the whole operation, telling Penney's lawyers, "That's the risk your client took." Is there any hope in sight for investors and the business, or are we watching the last desperate gasps of an American dynasty?

It's not good news
The move from Vornado is clearly the most troubling. The company bought into Penney alongside Bill Ackman back in 2010. In a rare spectacle, the big fund seems to be getting hosed just like the little guy. Vornado has already lost around $300 million on its position, with this newest sale adding to the fall. But the company isn't getting out completely. This sale represents close to 40% of the company's position, which last week accounted for 11% of J.C. Penney's outstanding shares.

The move is obviously an about-face on the company's outlook, and more subtly on the belief that CEO Ron Johnson can make the big difference that he was expected to make. At the time of the Vornado purchase, its CEO Steven Roth had effectively sworn off these sorts of big investments. With the buy, the trust made a bold and loud move. Roth himself said of the deal, "If you look at the math and you look at the investment, I think you'll agree it's a pretty terrific investment." Now that terrific investment -- made at over $25 per share -- is looking horrific.

The pronouncement from Judge Oing just compounds the misery. Not only does J.C. Penney now have to worry about a lawsuit sucking cash out of the company, it also has to worry about sunk investment costs associated with the Martha Stewart shops. Those costs cut into Martha Stewart, as well. The company reported $800,000 worth of Penney-Macy's related legal fees last quarter. 

The fight ahead
For all of the bad news, the legal wrangling is still anybody's game. While Judge Oing has been pronouncing against J.C. Penney, he also shot down a similar injunction last year. That's one of the things complicating the case -- there are odd player interactions. Macy's filed two injunctions last year, one against Penney and one against Stewart. The Stewart injunction was upheld but the Penney injunction wasn't. The judge admits that this is all pretty confusing, but that hasn't stopped him from plowing ahead with all sorts of snippets like the one above.

The effects of the case seem to be heavily weighted in Macy's favor right now. The company is doing well, and is allegedly not overly reliant on Martha Stewart's line. Martha Stewart is also on the rocks, with the stock falling 44% over the last 12 months. Cutting off the lucrative J.C. Penney contract could be horrible news, and set a bad precedent. J.C. Penney is also relying heavily on the deal. Not only will it be selling the merchandise, it also holds 17% of Stewart's stock.

The bottom line
I think a lot of J.C. Penney's current mess lays squarely on the shoulders of Johnson. He seriously needs to rethink his long-term plan, and investors need to be absolutely clear on what they demand from him. With Vornado turning its interest level down, there's going to be a chance for other big investors to take a larger role in the direction of the company. Given Ackman's previous antics, I wouldn't be surprised to see him piping up over the next month.

For investors, the bottom line is inconsistency. The plan hasn't been executed as promised, the future of the Macy's litigation is all but unknowable, and the big names attached to the stock are in motion. Until all that settles down, and until Johnson articulates how the company moves from where it is to where it needs to be, I'd stay well clear of J.C. Penney.

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