JCPenney's turnadown

If there was a category for worst incoming CEO of this century, Ron Johnson would without a doubt be the winner.  In his one year or so as CEO, just a looking at the financial results is humorously appalling.  It is almost impossible to match his level of underachievement.  In one year current assets began $2.2 billion higher than current liabilities and with the end of his tenure were just $300 million higher, on the edge of complete instability.  Stockholder's equity had declined from $3.9 billion to $2.8 billion, and sales had dropped from $18.5 billion to under $13 billion.  It's an achievement that's almost impossible to comprehend.

Johnson was recruited from Apple's marketing division with a huge up front bonus plus the usual great salary and incentives.  Sometimes people who work for phenomenal hands on CEO's turn out to be useless placekeepers, and that's obviously what Johnson was.  His plans for a major reshaping of JCP were naive and arrogant.  Long term they may have had, I think did have, some potential but results need to come before adulation seeking strategic hopes.

JCP was a middling company with a loyal but aging customer base and a lack growth prospects when Johnson took over.  It did, however, have those customers and it did have a viable if unexciting balance sheet.  Johnson overwhelmed the company with ideas for change, stores within stores, and the spending requirements to implement such a strategy.  He eliminated long term company brands, inherently more profitable items for any store and often less expensive for the consumer, and at the same time pissed off some long term branded product producers by looking for concessions to allow them to join the store within store concept.  Politely his actions could be called "too much too soon", more bluntly they could just be called stupid.

On top of that, he was such a star that he would only work a four day week at headquarters in Texas, keeping his home in California.  He hired others from Apple that he had worked with and they had the same deal, four days a week and home to New York for one as an example.  In the midst of such of dramatic turnaround, determined and committed CEO's who succeed often spend seven days a week in their headquarters until things are settled down.  The resentment that he created among long term employees, many key employees, was huge.

All of that is history but worth repeating I think because the question is really, as an investor, what to do now.  One positive is that I can find only sell or underperform ratings on the stock from sell side analysts  That can't get worse.  Yet JCP did receive a $2.25 billion addition to its term loan with no change in terms in late April.  I say no change in terms but they basically had to pledge the majority of the real estate to secure the new credit.

So however fragile, there is still the possibility of value there, I think it's what one could call "deep, very deep, value".  The new CEO is the former one, Myron Ullman, who kept the company afloat in a viable way but let it languish.  At a minimum now, he has some loyalty remaining among employees.  He is no innovator of consequence, but he seems committed to settling things down.  People may be seriously ready to work hard for him after their experience with the aloof Johnson.  They do want their continuity of employment, retirement plans, and lives to stay intact, and Johnson was busy destroying that possibility.

Here I am foolish enough to have bought some stock at around $19 and some more at $17, with an average cost basis of $18 and the stock now trading in $17.  Will I sell it all at $15 and take my medicine, YES.  Do I think that there is potentially some real upside, YES.  School year beginning time and Christmas will make or break this company.  Any improvement of even mild consequence will help the stock.  JCP will be competing on price aggressively which could bring shoppers back in but likely be no real benefit to profitability near term.

We'll see.  It's an interesting story.  A few new motivated hires to aid Ullman and few new interested shareholders with clout could change this story significantly over time.  If that doesn't happen, this investor will be gone with a loss, not too big but never fun.


Postscript:   during the second quarter George Soros bought a 7% position in the stock, and in 2010 the activist Bill Ackman built a 17% share that he has stayed with, believing in the eventual upside potential.  These are investors who take risks, but their track record overall is one of making money, Soros seemingly more consistently than Ackman..