In retrospect, the transformation experiment led by newly hired CEO Ron Johnson from 2011 to 2013 turned out to be the lost years for J.C. Penney Company, Inc. (NYSE: JCP). Instead of leading the resurgence of the iconic retail brand, Johnson proceeded to run the company further into the ground, prompting another leadership change in 2013. As of January 2016, under the leadership of Marvin Ellison, who successfully headed up Home Depot, J.C. Penney is once again transforming itself back to what it was but with an omnichannel twist. The turnaround has been well received by patient investors who have, thus far, been willing to give J.C. Penney’s new management the benefit of the doubt.
What Went Wrong With J.C. Penney’s Big Transformation?
In hindsight, everything went wrong with Ron Johnson’s big experiment. As an outsider who had run Apple’s retail store division, Johnson came in with a big vision and lofty ideas to bring the stodgy retailer into the 21st century. Wanting to create a “fair pricing” scheme with everyday low pricing, he did away with the store’s beloved discounting and store coupon events. Longtime customers began to revolt. Then, when he turned its retail space into a “store of stores” by creating brand-specific shopping areas, customers became confused, especially when Johnson did away with many of the store’s popular private label brands in the process. Johnson’s attempt at changing the culture of an entrenched brand failed miserably, and he was replaced by former J.C. Penney CEO Mike Ullman on an interim basis.
Out With the New and in With the Old
Ullman’s first task was to begin undoing the failed strategies of Johnson. He promptly brought back J.C. Penney’s promotional pricing strategy and began reintroducing the private label brands Johnson had removed. The one legacy of Johnson’s that management continues into 2016 is his cost-cutting strategy, which has been at the core of the store’s turnaround over the last two years. The cutting continues, and analysts credit it with keeping the company out of bankruptcy.
In September 2013, management backtracked on earlier plans by going forward with a new stock issue that raised $785 million. Although the move, which resulted in the dilution of existing shares, was not well received, it did balance out the company’s financial position, which was heavily indebted.
Taking J.C. Penney Into the 21st Century
CEO Marvin Ellison took over in August 2015, bringing with him a wealth of experience from his time as executive vice president of Home Depot. He immediately set out to create a J.C. Penney that could thrive in the modern marketplace by developing a true omnichannel retail model that seamlessly integrates customers’ online, mobile and in-store shopping experiences. Ellison was part of the highly successful omnichannel rollout at Home Depot, which he says can work equally well for J.C. Penney. Other strategies include building out J.C. Penney’s private label brands, especially its highly popular cosmetics line. So far, Ellison has shown that J.C. Penney did not need a complete transformation; rather, it needed to modernize the strategies that had worked for so long.
What Does It Mean for JCP Stock?
During the two years under Rob Johnson, same-store sales dropped sharply, costing the company nearly $6 billion in lost sales. Since 2013, J.C. Penney has consistently posted same-store sales growth and increased sales per customers, which is the key to achieving the scale it needs to increase profit margins. Although J.C. Penney is not expected to return to profitability until 2017, the trajectory of key measures continues to improve.
After peaking at $42 a share in early 2012, near the start of Johnson’s brief tenure, J.C. Penney shares fell more than half by the time of his ouster. After a brief recovery following Johnson’s departure, the stock languished under $10 a share for nearly two years. In 2015, as J.C. Penney’s improving financial condition began to take hold, investors warmed up to its stock, taking it from just above $6 a share to above $9. Since September 2015, the stock fell off to start 2016, mainly in concert with the rest of the market, but has since rallied in February.
J.C. Penney will never be the retail giant it was once; however, at its current valuation of about $2.5 billion, down from its peak of $20 billion, it will be easier to sustain its cost-cutting structure while growing sales under its more modern retail strategies. As it gradually reconnects with its 87 million customers, J.C. Penney should be able to complete its turnaround, resulting in increased confidence in its stock for years to come, potentially foreshadowed by the stock's performance in February.