Tickers in this Article: AAPL, JCP, BBY, DELL, TGT, KSS, SHLD
Most workers go their entire career with only a vague sense of how much a company values their work. Ron Johnson isn't most workers, though, as investors boosted the value of J.C. Penney (NYSE:JCP) shares by more than $1 billion on word that he had agreed to leave Apple (Nasdaq:AAPL) and join this established mall-based retailer as its soon-to-be CEO.

TUTORIAL: Stock Basics

J.C. Penney Recruits a Proven Winner
While at Apple, Ron Johnson held the title of Senior Vice President of Retail, but what he really did was oversee the opening of more than 300 Apple stores that now produce upwards of $10 billion in sales. Almost every analyst now views the Apple store concept as a key part of its sales strategy, a major brand reinforcement, and a savvy move by a company always thinking a few steps ahead. (For more, see CEO Savvy And Stock's Success Go Hand In Hand.)

Of course, it wasn't always like this - at the time of the launch, it was seen as ridiculous, a sign of Steve Jobs' hubris and a mistake that would quickly be pounced upon by the likes of Best Buy (NYSE:BBY), Circuit City and Dell (Nasdaq:DELL). While it is easy to dismiss the success of Apple's retail outlets as just being dragged in the wake of super-popular iPods, iPhones, and iPods, that misses the mark. Plenty of companies failed in their attempts to build stores around hot products and Apple has leveraged its store base into a force multiplier for its brand and its business. (For related reading, check out Best Buy Has A Number Of Profit Levers To Pull)

What's more, Apple isn't Mr. Johnson's only success. Prior to joining Apple, he was the VP of merchandising at Target (NYSE:TGT) at a time when Target transitioned from just a regional discount retailer - a wannabe Wal-Mart (NYSE:WMT) - into a national retailer with its own distinct identity and solid traffic growth. Many things go into building a retail success story (Wal-Mart's logistics expertise, for instance), but merchandising is a cornerstone - if a store does not carry what people want - sometimes before they even know they want it - it does not matter how nice the stores look or how cheap the merchandise is. So even if it is too much to lay Target's success fully at Johnson's feet, he had a major role in building Target into what it is today.

A Setback for Apple?
If Johnson's services are worth over $1 billion to J.C. Penney shareholders, it stands to reason that Apple has also suffered a loss. The question, though, is the magnitude of that loss. In terms of domestic stores, Apple is probably fine - they just need to keep doing what they've already done and maybe make a few subtle tweaks here and there to stay fresh.

The bigger loss may be felt as Apple looks to take the store concept international, to say nothing of investor nervousness that this may be only the start of high-level executive defections. If Steve Jobs' time in charge of Apple is nearing a close, what was once an assembly of peers may fall out and go their separate ways, making Apple shareholders worse off.

By the same token, this could have certainly gone worse for Apple. Best Buy could likely use a person of Mr. Johnson's skills as it looks to find new ways to remain relevant in consumer tech retail.

Leadership Matters
Skeptics have already made their voices heard; pointing out that J.C. Penney sells undifferentiated merchandise that consumers can buy anywhere as opposed to Apple's exclusive products. That is certainly true, but perhaps short-sighted.

First, do not underestimate the importance of a consumer's shopping experience. Even people who do not especially like Apple products can find a lot to like in the Apple store shopping experience. In that regard, then, Mr. Johnson can potentially drive more traffic simply by making the J.C. Penney shopping experience better than that at Kohl's (NYSE:KSS), Macy's (NYSE:M), Sears (Nasdaq:SHLD) and so on. (For related reading, check out 5 Of The Most Adaptive Companies.)

Furthermore, just because J.C. Penney does not have a lot of exclusive merchandise today does not mean they cannot tomorrow. Mr. Johnson introduced store-owned lines at Target and they were successful. The same could easily be tried at J.C. Penney and that could not only boost margins, but improve the "stickiness" of the J.C. Penney shopper.

The Bottom Line
Tuesday's stock action certainly baked in some of the value of a new CEO at J.C. Penney, but investors should not just assume that is the end of the story. Good executives just have a knack for building more value than anybody is ever willing to initially assume, and Mr. Johnson has established himself as a good executive. True, this will be the first time he is in charge of a company outright, but in the cutthroat world of mass consumer retailing even relatively small tweaks can make major differences to sales, profits and cash flow.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

comments powered by Disqus

Trading Center