With apologies to Forrest Gump, genius is as genius does. That may be one of the lessons of Ron Johnson’s disastrous 17-month tenure at J.C. Penney (NYSE: JCP).
The former Apple and Target retailing genius was ousted yesterday after his turnaround plans for the chain culminated in shoppers fleeing the stores in droves and the company rapidly running out of cash. Another lesson: High risk, high-concept retailing strategies, it seems, don’t work when it comes to trying to overhaul the business and image of a century-old retailer like Penney.
So, it’s out with the old – and back with the older still, as the beleagured retailer’s board summoned 66-year-old Myron Ullman, the company’s former CEO, to return to his old job and try and guide J.C. Penney back from the brink. While investors may have been delighted to see Johnson’s back as he exited, they were less delighted by Ullman’s return. He’s seen as someone who knows J.C. Penney and its customers well (a big plus) and a kind of elder statesman, but not someone who will be able to undertake the radical overhaul of the retailer’s business that Johnson’s brief tenure has now made even more necessary.
Certainly, shareholders ended up getting little in the way of a lasting boost when the news of Johnson’s departure rippled through the market late yesterday afternoon. The stock, which had been lumbering along at between $15.50 and $16 a share for most of the day, briefly shot up to nearly $18 a share when the news of Johnson’s ouster hit the wires, only to lose all of those gains and more within an hour. By the time the dust settled this morning, the retailer’s shares had fallen 11 percent to just above $14, the lowest levels the stock has seen since the market began to recover from the financial crisis in the spring of 2009. It was, said one trader watching the market drama late Monday, a classic “short squeeze,” as bearish traders and hedge fund managers who had been betting that it was only a matter of time before J.C. Penney ended up filing for bankruptcy court protection, scrambled to cover their bearish bets.
Once that was done, however, there was no more buying waiting in the wings. Anyone who saw J.C. Penney as a bargain-priced value stock rather than a busted business model had already bought the stock and had zero interest in adding to their positions at higher prices.
It’s hard to see what difference the change at the top will make at this stage. Johnson’s controversial plan to overhaul Penney’s business – transforming its stores into hubs for in-store boutiques while eliminating the retailer’s traditional reliance on discount-priced merchandise – remains unproven. Some of those boutiques opened their doors last year and generated sales that were better than those of the chain as a whole, but that’s not saying much: The fourth quarter saw same-store sales plummet 32 percent, one of the worst quarterly same-store sales performances ever recorded by a U.S. retailer in such a short period of time.
To some extent, Johnson was the victim of high expectations, fueled by activist investor Bill Ackman of Pershing Square Asset Management, whose hedge fund is one of the retailer’s biggest investors and who had pushed Penney’s board to hire Johnson as a retail visionary less than two years ago. When he arrived, the stock shot higher, as investors bet that anyone who had presided over Apple’s rise to retail dominance and played a role in Target’s emergence as a discount brand for fashionistas, couldn’t help but work similar wonders at Penney. The old-line retailer had been stuck with a stodgy image and the beginnings of a business problem as it struggled to cope with a surge in cotton prices that had squeezed margins on core clothing lines.
Johnson did what he had been asked to do: re-imagine J.C. Penney, launched in the 19th century, for the 21st century. But the execution was clumsy: He didn’t test his bright new ideas before rolling them out, and while waiting for those ideas to prove to be on target, he alienated the brand’s remaining loyalists by eliminating discounts. As the cash levels kept diminishing, forcing the company to suspend its dividend payments and delay some payments to its vendors, the clock began ticking on Johnson’s tenure.
The writing was on the wall when Vornado Equity Trust, whose own CEO, Steve Roth, sits on Penney’s board, sold off nearly half of its stake in Penney earlier this year. Ackman himself turned on the man he had brought in, saying last week that criticism of Johnson’s tenure had been “deserved” and that execution under the CEO had been “something very close to a disaster.”
There is an argument that Johnson simply ran out of time to prove the validity of his concept, and that if J.C. Penney manages to ride out the storm, it will end up looking like the kind of store that Johnson had imagined. But that is a big “if.” After all, odds are that Penney is going to have a tough time finding someone to step into Johnson’s shoes on a permanent basis. (Ullman is widely viewed as a caretaker CEO, likely lured back because at this stage of his career, he already has established a reputation and will be overseeing a company whose problems are directly associated with Johnson.
Johnson himself? Well, in contrast with many CEOs who steer their companies to the brink, he’s not walking away with a platinum handshake, or even a golden one, SEC filings suggest. True, he was paid about $50 million in stock to lure him aboard – but that is worth less than half of what it was when the award was made. There’s no big farewell payoff: He gets unpaid salary and unused vacation time, just as most of us normal folks would, as well as about $106,000 in a company savings plan. The total comes to a mere $148,924.
He would have been slightly better off, financially speaking, had he died: His estate would have earned $157,101. True, he’s not exactly poverty stricken, having earned about $1.9 million in 2012, but unsurprisingly that didn’t include a bonus or any further stock grants – and the original stock grant was made to cover the cost of a person investment that Johnson made in the company. In other words, the ousted CEO did put his money where his mouth was.
The question now is whether the 54-year-old Johnson’s brief tenure at the helm of J.C. Penney has so tarnished his reputation as a brilliant retailer that he is unemployable. Almost immediately, the buzz on the street was that Apple may want to consider re-employing him. Since his departure, the electronics giant has struggled to fill the top retail spot in its hierarchy. His failure at J.C. Penney shouldn’t count against him, given the vastly different nature of the two businesses, but just as the last year or so has transformed J.C. Penney from a company facing business challenges into one that is deeply troubled, so it has left Johnson with the unwelcome reputation of being a stubborn and perhaps even arrogant leader unwilling to compromise or consider that he might be wrong until very late in the game.
The only certainty is that J.C. Penney today isn’t any more appealing as an investment than it was yesterday. True, many of the short-sellers have been shaken out by the extreme volatility in the immediate aftermath of the news of Johnson’s departure – but that just means that there is less likelihood of another short squeeze propelling the stock price higher any time soon, and more probability that the shorts will come back in to re-establish some of those positions in the coming weeks.
The company is still strapped for cash, still grappling with the need to re-instill loyalty among its alienated customers, still at war with Macy’s over Martha Stewart’s collection, and still battling a tough retail environment. Shareholders may have been praying for Johnson’s departure, but it could prove to be too little, too late.
