Ackman Finally Realizes That JCPenney Hit Rock Bottom. Now What?

by James Brumley | April 9, 2013 8:32 am

Ackman Finally Realizes That JCPenney Hit Rock Bottom. Now What?

How long does it take someone to turn a respectable retailer with reasonable potential into a complete shambles?

If that someone is former Apple (NASDAQ:AAPL[1]) executive Ron Johnson, then the answer is 524 days.

That’s how long Johnson served as CEO of JCPenney (NYSE:JCP[2]) before his boss and the company’s biggest shareholder finally pulled the plug. As of Monday afternoon, Johnson was removed from his post at the helm of one of America’s most iconic department stores, and investors responded with a 7% haircut to JCP shares.

It wasn’t a glorious year-and-a-half. Indeed, it was very disappointing. During that time, year-over-year sales slumped each and every quarter, with quarterly sales reaching a 20-year low in fiscal Q4 (calendar Q3, give or take) last year. Last quarter’s operating loss of $745 million also was a multiyear record.

In retrospect, things clearly didn’t work out, but as spectacular as the failure was, that’s not the amazing part of the story.

What’s so amazing is that so many onlookers continued to drink the Ron Johnson-flavored Kool-Aid for so long, refusing to recognize that the guy never “got it.”

Not Even Close

Just as a reminder, it was hedge fund manager Bill Ackman that hand-picked Ron Johnson in mid-2011 to lead JCPenney through a turnaround — a call he could make, as his hedge fund Pershing Square took an a 17% stake in the retailer that year, becoming the biggest shareholder in the process.

Ackman never doubted his pick, either, boldly saying “Ron Johnson is the Steve Jobs of the retail industry” even before Johnson took the over as CEO in November of that year.

However, when Johnson was brought into the fold, Ackman wasn’t the only one singing his praises. JCP Chairman of the Board (and former CEO) Myron “Mike” Ullman said around that time:

“I am delighted that Ron is joining our Board and the Company, and look forward to working with him as we continue to transform the J.C. Penney brand. He is widely recognized and highly regarded in the retail industry for his creativity and innovation, his commitment to empowering employees to deliver an unparalleled customer experience, and to making stores exciting places where people love to shop. His tremendous accomplishments at Apple (as chief of Apple’s stores) and Target (NYSE:TGT[3]) speak to his great consumer merchandising, marketing and operational talent.”

Even after it was clear that JCPenney was in trouble, Ackman still seemed willing to give the company — and Johnson — plenty of time to put the retailer on the right path. In January of this year, he stated, “If three years from now, Ron Johnson is still struggling to turn around JCPenney, then he’s probably the wrong guy.”

Well, as it turns out, Ron Johnson isn’t the Steve Jobs of the retail industry. His so-called “creativity and innovation” appears to have had more to do with Apple’s self-selling products and less to do with him having his finger on the pulse of American consumerism. Again, Johnson led the company to a deep loss last quarter, and the worst revenue in 20 years two quarters ago. Customer complaints about the “new” JCPenney soared with each major overhaul he applied … overhauls which, by the way, he largely refused to test on a small scale before rolling them out to all stores.

Johnson himself seemed a little delusional at times over the past 14 months, saying the shop concept “is gaining traction with customers every day” on the very same day the company reported that fiscal Q3’s sales fell more than 26% on a year-over-year basis. By that time, however, nobody was surprised.

More than anything, though, while it’s clear that Ackman no longer plans to give Johnson three years to make things work, little has actually changed with the company since his January comments.

Folks, that’s a lot of optimism from some guys that have a lot of experience and make a lot of money — and are paid to be right — for the whole thing to end in what Ackman himself described as a “disaster” on Monday afternoon.

Now What?

The good news is, JCPenney can be salvaged. The bad news is, it’s going to take a lot longer than another 14 months to undo the damage Ron Johnson has done.

The “new guy” also happens to be the “old guy”: Mike Ullman. He was the CEO of JCPenney from December 2004 through October 2011 when he handed the baton to Johnson. Under his leadership, JCPenney did well, even if not great. At this point, though, just doing ‘well’ would be a huge improvement.

For investors, this is one of those darkest-before-dawn situations. Time to go shopping.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

Endnotes:
  1. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  2. JCP: http://studio-5.financialcontent.com/investplace/quote?Symbol=JCP
  3. TGT: http://studio-5.financialcontent.com/investplace/quote?Symbol=TGT

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