Johnson's failure is a blow for Ackman, who is now accepting Ullman as CEO, the very man he helped push out in 2011.
Ackman first disclosed his J.C. Penney stake in October 2010, when his $13 billion hedge-fund firm filed documents showing that it held a 16.5 percent stake in the retailer. Vornado Realty Trust, a real estate investment trust run by Steven Roth that has teamed up with Ackman in the past, simultaneously disclosed that it had acquired a 9.9 percent stake in J.C. Penney.
Ackman spent more than $1 billion to acquire 39 million common shares at an average cost of about $25.90 each. Pershing Square later raised its economic stake by entering into swap contracts on an additional 15.9 million J.C. Penney shares that would require the hedge fund to pay out cash to the extent the retailer's stock price fell below $26.14.
Ackman didn't return a phone call and email seeking comment, and J.C. Penney declined to make Ullman available.
Based on Monday's closing share price, Pershing Square has a loss on its J.C. Penney shares of about $390 million, or 39 percent. In addition, it has a partially realized loss of $164 million on the total return swaps it holds.
Ackman's best shot at salvaging the investment may be to push the department store to go private, a move that may require additional capital. The retailer is now trading at a 73 percent discount to its annual revenue, the second-cheapest among U.S. department-store chains, according to data compiled by Bloomberg.
Because J.C. Penney also has the industry's highest ratio of net debt to market value, a traditional leveraged buyout is unlikely, Morningstar Inc. said last month. Another option is to place some properties into a real estate investment trust, International Strategy & Investment Group LLC, said last month.
J.C. Penney's setbacks have left its equity priced at 27 cents for each dollar of revenue, a valuation that lags Macy's, Nordstrom, Kohl's, Dillard's and Saks, data compiled by Bloomberg show.
Last week, Ackman abruptly stopped defending his man, saying at a conference that Johnson had made changes too quickly and called the turnaround "close to a disaster."
Now it's up to Ullman to stabilize the company. In his previous stint as CEO from 2004 to 2011, he breathed life into the chain with new brands such as Sephora and Liz Claiborne. Sales grew in 2005 and 2006, and the shares more than doubled through February 2007. Then came the downturn and a corresponding slide in sales. Ackman began pushing for changes in 2010.
Ullman "was caught in a business model at J.C. Penney that needed an injection of energy, and he brought in some new brands that were successful." said Robin Lewis, a retail consultant in New York. "But perhaps he didn't do it fast enough for shareholders and the board. He was struggling, and that's when Ackman got involved."