JC Penney surprised The Street and the entire retail industry tonight with the sacking of Ron Johnson, during whose brief tenure on top roughly a billion dollars and several decades worth of customer goodwill had been exploded into the aether, like an old stadium wired with dynamite and blown to bits.
This was demolition work, they may as well have sent wrecking balls careening toward the stores themselves.
But let’s keep it real…
First, JC Penney’s sucked before he got there too – the choice was to hire a revolutionary guy to make big changes or just allow nature to take its course for another ten years until the company was finished anyway.
Johnson’s mandate was probably to “think outside the box” and make bold moves, the kind of shit people say out loud but get really nervous about in real life when they see it happening.
I’ve sat on the Fast Money panel week after week listening to justifications, excuses, silver linings, magic incantations, prayers, begging and all manner of cognitive dissonance as investors, analysts and the like sought to spin the disaster this way and that. The correct approach to the stock has been, “Sure, it may turn around. But why buy without evidence that it is?” Never once was any such evidence apparent.
The fatal mistake the company made was not testing Johnson’s ideas in a handful of markets. The full-bore, across the nation rebranding and remodeling was way more aggressive than what was needed. It’s not as though Johnson inherited some kind of emergency triage situation – merely a dowdy, third-rate department store that needed to appeal to a younger shopper while maintaining the core customer base. I’m not sure what possessed this guy to flip the whole thing upside down in six months’ time.
The country doesn’t need another Macys or Bloomingdales or Nordstroms. What it could have used was a sexier JC Penney. Why wasn’t that a good enough aspiration? Why does everyone feel the need to move upmarket these days? It’s almost like a reflex. Most of the country is not what you’d consider upscale – but they go to the mall and spend money just the same.
The eliminating sales thing made sense in theory – why not just go low-price-always? Here’s why – because people don’t know what your markups are and can’t judge whether or not you’re giving them low price unless you put up a big sign over the stuff saying “SALE”. Customers aren’t merchandisers, they don’t see it as “low price”, they see it as “not on sale” – even if the price is exactly the same as a sale price. Since Johnson’s experience at the Apple store consists of selling all items at full price all the time with no sales ever, it’s not hard to see why he didn’t get this.
Maybe Ron Johnson will make his talents available to Best Buy or Barnes & Noble. It’s not like he’s going to demolish another retailer, right?
The new/old guy they brought back now has the formidable task to restore JC Penney to its prior glory as America’s Mediocre Retailer. Knock yourself out, Ullman, and don’t be shy about ripping out those store-within-a-store-within-a-store-within-a-store installations. My aunt and her gym teacher live-in girlfriend couldn’t make heads or tails of that shit – all they wanted was some denim vests and a fuckin’ picture frame.
If you’ve been long the stock, you have no method, no process or discipline. You basically buy what other people are talking about and take shots on things because they went down a lot. This is evident because there was nothing technically or fundamentally straightforward about this morass, ever.
Many years from now, they will teach this episode at business schools across country as a case study. They will conclude that:
This is what happens when you let a hedge fund manager select a CEO.
This is what happens when you tell someone to be a maverick and “go big” – it sometimes doesn’t work out.
This is what happens when you make huge gambles on hunches without testing and measuring.
For investors, the takeaway is that there is no such thing as buy-and-hold, no matter how storied or established or venerated a company is. Disaster is always possible – statistically likely, even. Almost no long-lived company has been immune.
Lastly – Dodge & Cox, Fidelity and State Street hold a combined 25% of JC Penney’s shares outstanding, about 52 million shares as of their last filings. Even the big guys get beclowned. The difference is that they don’t care. You might, so avoid “playing turnarounds” that aren’t actually turning around yet.
What happens from here is anyone’s guess. Maybe it doubles! Maybe its suppliers stop supplying and it gets liquidated. I have no idea. What I do know is that I will have zero exposure to this either way. Life’s too short and too many other good investments present themselves each and every day.
Sorry it didn’t work out Ron, tough break.