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Roth’s Two Step: Quit JCP Board, Dump Holdings

JC Penney’s (JCP) board continues to remain a constant source of retail drama. Steven Roth, Chairman and CEO of Vornado Realty Trust (VNO), just resigned from JCP’s board, announcing  plans to sell his considerable stake in the retail chain.

Roth, who currently own 6.1% of JCP, filed with the U.S. Securities and Exchange Commission with plans to dump his JCP’s holdings in the “not-too-distant future.”

Roth’s planned departure comes on the heels of hedge-fund manager William Ackman’s very public and very embittered ouster from the company. Ackman was Vornado’s investment partner, and the two joined forces in 2010 to acquire enough JCP stock to muscle their way onto the board and force managerial change.

Deborah Weinswig, an analyst at Citigroup Inc., said, “We don’t think Roth’s resignation or Vornado’s decision to sell its stake comes as a surprise to investors.”

Roth has built a career on aggressive takeovers and assuming the role of the activist investor. In 1980, he took over the reins of Vornado, which at the time was languishing. Now, under his tutelage, it has grown into the third largest real estate investment trust by market value in the U.S.

And Roth didn’t stop there, acquiring large stakes in Toys “R” Us, Sears Holding Corp. and McDonald’s Corp. His fellow investors have generally been happy to follow his brash lead; Vornado shares produce an annual return of 10.3% over the past ten years, beating the S&P’s 500 Index benchmark of 7.1% over the same period of time.

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JCP, however, has fallen on hard times. JCP reported a monumental $586 million loss for the second quarter ending August 3rd, widespread attention has turned to the company’s overall financial profile. Fears about the company’s creditworthiness already swirled about the industry last July when factoring firm CIT placed a considerable basket of orders on hold, ostensibly worried about its cash flow.

JCP’s gross margins have been particularly worrisome. Over the second quarter, JCP’s gross margin nose-dived to 29.6% from 33.2%.

William Susman, founder of the research firm Threadstone partners, gave a more wary appraisal. “JCP is a capital-intensive turnaround with limited current liquidity. The vendor base has no choice but to sell them. However, they are out of the mall and in neverland if they believe they will make their margins,” he said.

In 2010, Ackman’s Pershing Square Capital Management LP and Vornado bought significant stake sin JCP, 16.5% and 9.9% respectively. They managed their way onto the board by 2011 and orchestrated the hiring of Ron Johnson, a former top level executive for Apple Inc. Johnson’s sweeping transformation of JCP’s traditional business model now lives in infamy, a cautionary tale for retailers everywhere.