JC Penney recently announced that it has revamped its most popular private label brand, Arizona Jeans, just in time for the back-to-school season. One in three JC Penney customers buy the Arizona brand, making it the largest private brand offered by the retailer.
To generate even more excitement for the brand, JC Penney has contracted twin sisters and YouTube sensations Brooklyn and Bailey McKnight to serve as Arizona brand ambassadors.
Back-to-school is a critical time for department stores like JC Penney as it provides an opportunity to generate significant revenue. Back-to-school is the second largest shopping season outside of Christmas for retailers.
What JC Penney is focused on the most, however, isn't back-to-school—it's coming back to life. Few retailers have experienced losses in revenue, reputation and customers like JC Penney. At 116 years old, the company has never been closer to death.
The Visionaries
The downfall of JC Penney began on October 7, 2010, when investors Steven Roth, head of the REIT Vornado, and Bill Ackman, the head of hedge fund Pershing Square Capital, teamed to buy more than 26% of JC Penney's stock.
Roth and Ackman were convinced that JC Penney, whose revenues had dropped from $20.2 billion in 2007 to $17.8 billion in 2011, could be turned around. The stock that was trading at $32 could easily become a $60 stock if JC Penney implemented a strategy to transform the company.
Instead of attempting a hostile takeover of the company, Roth and Ackman chose to reach out to Myron Ullman III, CEO of JC Penney, to discuss their vision for a new and improved JC Penney. Ullman had a past relationship with Roth and agreed to listen. Ullman not only listened to what Roth and Ackman had to say, Ullman invited each to join JC Penney's Board of Directors.
When Ullman was injured in a car accident, discussions changed from Ullman implementing the strategy proposed by Roth and Ackman to finding a retail executive capable of replacing Ullman. Ullman recommended Ron Johnson, a former Target executive. Johnson had also been recruited by Apple to design and run its Apple Stores.
Johnson expressed interest in the position and he spoke positively about the potential for JC Penney to grow. JC Penney announced in June 2011 that Ron Johnson would become CEO starting in November. Johnson, who had an idea for a new kind of retail store, was about to get the chance to make it a reality.
Ron Johnson And The Destruction of JC Penney
The Johnson era at JC Penney will go down in history as one of the most destructive reigns by any CEO in any company—ever.
I won't outline everything that went wrong for JC Penney under Johnson's leadership as CEO here. (To learn all of the details, read Jennifer Reingold's excellent article "How to Fail in Business While Really, Really Trying.")
At a high-level, Johnson's strategy focused on several key areas:
- End the use of constant markdowns on price and the reliance on coupons to generate store traffic. Instead, Johnson wanted to offer customers easy-to-understand "fair and square" pricing.
- Turn JC Penney stores into a retail destination by opening as many as 100 separate boutiques filled with branded merchandise inside each JC Penney store with a town square in the center.
- Reduce the focus on private label brands even though the brands generated 50% of sales and billions in revenue for the company.
This strategy was radically different than the operating model JC Penney had been using for years.
Johnson believed he could create a better customer experience for JC Penney's core customers while attracting new customers to the stores. Attracting new customers was exactly what JC Penney needed. Johnson's idea of opening 100 boutiques, although flawed in my opinion, had merit.
I believe a better strategy for the company would have been for Johnson to identify a small number of strategic brands and introduce them slowly within the stores. The goal should have been to complement the company's proven private-label brands with branded merchandise.
The board at JC Penney wanted a CEO to transform the company and Johnson's plan was definitely transformative.
In a hurry to prove his vision for JC Penney was the right one, Johnson hired a team of outsiders to fill critical senior-level positions; terminated more than 19,000 employees; ended the use of discounts; and ordered that stores be revamped without testing whether any of his ideas would resonate with customers.
After all, what could go wrong? Johnson had created the Apple Store and it was the most profitable retail store in the world.
Sixteen months after becoming CEO, Johnson was fired by the same board that had hailed him as a savior of the company. In 2012, at the end of Johnson's first year as CEO, same-store sales fell 25% resulting in a $4.3 billion decrease in revenue. The company recorded a $1 billion loss and the stock fell to $18.
Customers had abandoned JC Penney in droves, proving that Johnson should have first tested his ideas before implementing them company wide. Johnson's strategy had driven away the company's core customers, and failed to attract the new customers so desperately needed.
No other CEO in the history of retail generated worse results in such a short period as Johnson. Ackman and Roth sold their shares losing hundreds of millions of dollars on their experiment with JC Penney.
In April 2013, Johnson was invited to speak at Stanford University. According to Johnson, the primary lesson he learned from his tenure as CEO was that he was a "terrible fit" for JC Penney.
A terrible fit? I disagree.
Johnson designed the strategy and he had complete command and control over how the strategy would be implemented and executed. He hand-picked executives from outside the company to fill senior roles and the executives reported directly to him. He had full support of the board including Ackman and Roth.
Johnson was also an experienced retail executive having begun his career at Mervyn's and eventually moving to Target. He knew exactly what kind of a company JC Penney was and he understood the type of customer who shopped at JC Penney. Johnson understood retail in detail.
When Johnson moved to Apple, Steve Jobs was his mentor. Johnson knew the difference between the euphoria created when Apple released a new product, and the joy a mom felt saving $5 on a blouse picked from a clearance rack.
Fit had nothing to do with Johnson failing at JC Penney. He failed because he chose the wrong strategy. Ron Johnson failed because of Ron Johnson.
The Return Of Myron Ullman
With Johnson gone, the board chose to play it safe by asking Myron Ullman to return as CEO.
Ullman went to work feverishly reversing nearly every single decision and strategy implemented under Johnson. One of the first actions taken by Ullman was to release an apology letter to customers informing them that the JC Penney they loved would soon return. Unfortunately for JC Penney, many customers had moved on with no intent of returning.
Ullman brought back private labels jettisoned under Johnson and reintroduced discount pricing and sales promotions. JC Penney lost $1.4 billion in 2013 and sales results were less than spectacular in 2014 and 2015. However, Ullman had accomplished his goal—the company had stabilized.
I've been asked many times if Ullman should have stayed the course with Johnson's strategy. I believe the question is flawed. The board asked Ullman to return for the purpose of stabilizing the company, not to launch another strategy to reinvent the company, nor was Ullman asked to stay the course with Johnson's strategy. Ullman did exactly as he was asked.
The board was so spooked at what they had witnessed under Johnson that all desire to transform JC Penney had vanished. The board made the wrong decision. Returning JC Penney back to the status quo was a catastrophic mistake.
Instead of hiring Ullman, the board should have hired a proven executive capable of not just stabilizing JC Penney, but of finishing the job to transform the company. Ron Johnson had failed as CEO but the reasons for JC Penney to transform remained.
Marvin Ellison: The Inexperienced Outsider
In August 2014, JC Penney announced that it had hired Marvin Ellison, an executive from Home Depot, to become the next CEO. Ellison had no prior experience as a CEO, resulting in JC Penney placing Ellison under the experienced and watchful eye of Myron Ullman and other executives to train Ellison. Ellison officially took over as CEO in August 2015.
JC Penney missed a chance to replace Ullman with an experienced turnaround expert and a retail executive capable of forming strategic partnerships, and leveraging M&A to better position the company for success.
Under Ellison's watch, focus remained on cutting costs and trying to convince current customers to buy more instead of implementing strategies to attract new customers.
Sales and the stock price continued to fall with Ellison in the role of CEO.
JC Penney announced on May 22, 2018 that Ellison had resigned to become the CEO of Lowe's.
Should Ellison have been able to do more as CEO? How? Ellison has little merchandising experience and his only tenure as CEO was at JC Penney. Ellison doesn't have any experience turning around a company or leading a transformation.
Ellison did the best he could and I believe he simply ran out of ideas. When the opportunity to become CEO of Lowe's presented itself, Ellison jumped at the chance to leave. Ellison is one of the good guys in business.
In a twist of irony, Bill Ackman, yes, the same Bill Ackman that took a stake in JC Penney, has taken a stake in Lowe's. Ackman is pressuring Ellison to hire new executives and implement a new strategy to make Lowe's a more competitive and profitable company. Sound familiar?
I do not fault Ackman for taking a position in JC Penney and I understand why he believes he can unlock value at Lowe's. Lowe's is at a severe disadvantage over Home Depot due to its sub-optimized supply chain and its less than stellar store operations.
JC Penney is currently searching for a new CEO and retail analysts are already raising the alarm that JC Penney may be unable to find a CEO qualified to turn around the company. I agree.
Can JC Penney Survive?
JC Penney has been in free fall in terms of revenue and its stock price. The company generated $20 billion in revenue in 2007, yet it is on track to only generate around $12.5 billion in 2018. The company currently has a market cap of $748 million and a stock price of $2.38 at the time of writing. Worse, the company has less than $180 million of cash on hand and has $4.1 billion in long term debt. There are a total of 860 JC Penney stores in operation.
James Cash Penney, the founder of JC Penney is rolling over in his grave. One of the most well-known, and for many years, one of the most respected retailers, is at risk of going out of business.
The challenge for JC Penney is that it has lost relevance across the board resulting in a significant decrease of customer traffic within its stores.
I do not believe any CEO can turn around the company without significantly changing the business model. Heavy debt and a lack of cash eliminates any possibility of trying to create a new and improved JC Penney on its own. That ship has sailed.
At a minimum, JC Penney should eliminate the sale of appliances, close all underperforming stores, and greatly shrink the size of all remaining stores. JC Penney has to identify the optimal assortment of products to sell in its stores as well as identify which products should be available online only. A big idea for JC Penney to consider is contracting Tompkins Associates' Monarch FX business unit to manage all supply chain, logistics inventory optimization and store replenishment. JC Penney should also evaluate contracting Amazon to manage its supply chain using Fulfillment By Amazon.
In order to live, JC Penney must be acquired or the company will have to seek out strategic partnerships. However, the company's debt may prevent some of the options I've outlined below from becoming a reality. JC Penney may have no choice but to declare bankruptcy before another retailer will attempt an acquisition.
I believe JC Penney has a chance to survive if any of the following become a reality:
Best Buy Acquires JC Penney
Hubert Joly, CEO of Best Buy, is credited with saving Best Buy. I believe he can do the same for JC Penney. Best Buy can open expanded showrooms inside JC Penney stores, displaying electronics and appliances to demonstrate the value of the connected home. Best Buy selling appliances in its stores isn't the best use of space. Best Buy can transition appliances and installation services to JC Penney.
Gaming and esports should be a major area of focus for Best Buy and JC Penney. This will attract more Generation Z and Millennial customers without alienating core customers.
Best Buy and JC Penney have the potential to create something special but it will require lots of work.
Amazon Acquires JC Penney
Amazon is investing heavily in furniture and home furnishings and will soon be selling appliances powered by its voice-activated technology, Echo. Although I don’t believe Amazon has to acquire a physical retailer to compete in furniture and home furnishings, acquiring JC Penney would allow Amazon to introduce its many private label brands inside JC Penney stores.
Amazon is an e-commerce company that understands the strategic value of physical stores, hence the acquisition of Whole Foods. It is plausible Amazon could acquire JC Penney to expand its physical store footprint and to expand its retail ecosystem.
Wayfair Partners With JC Penney
Wayfair could partner with JC Penney to open showrooms of furniture and home furnishings within JC Penney stores. JC Penney could open interior design centers for the home and leverage augmented reality/virtual reality to help customers identify the optimal furniture style and pieces for their home within their budget.
With a market cap of nearly $11 billion, Wayfair could acquire JC Penney under the right circumstances.
Wayfair doesn't need a physical store presence to succeed. However, if it was able to acquire JC Penney or partner with the company, there is value in Wayfair creating an omni-channel engagement with customers. Amazon proved the value of physical stores to an e-commerce retailer.
What I listed above is not a complete list of options. If JC Penney and its 860 store locations can be acquired for pennies on the dollar—multiple retailers including Home Depot, Menards or Lowe's could acquire the company.
Acquiring JC Penney will allow a home improvement retailer to expand its retail ecosystem, and increase its ability to meet the needs of customers for furniture, home furnishings and general merchandise all under a single banner.
If Lowe's acquired JC Penney, Bill Ackman would have the last laugh after all.
Aside from being acquired, JC Penney can pursue a strategic partnership with The Company Store to open expanded sections for down and bedding essentials inside stores. Overstock.Com and JC Penney working together offers unique possibilities. Partnerships with Restoration Hardware and Williams-Sonoma, among others, should be explored.
JC Penney has options. What JC Penney doesn't have is time. It is entirely possible that JC Penney will go out of business within a few short years.
