What Happened at JCPenney?

Waiting for the invitable b-school case

Eventually this will become an intriguing business-school case, particularly for those concentrating in marketing and general management.  Activist investors push hard to re-engineer, restructure and revitalize JCPenney, the old retailing outfit--languishing in modern times, struggling to expand, and suffering with losses and a tanking stock price in the post-recession recovery.

The old CEO resigns, and the company figures it has found the solution in a dynamic new CEO, who would swoop in and radically change JCP by casting upon it magical dust from Steve Jobs and Apple.  JCP, amidst fanfare, hires Ronald Johnson after he helped spawn and lead Apple's broadly successful and wildly popular store expansion.  Apple, Jobs and Johnson had transformed the branch-store and electronic-purchasing experience into in-store theater.

JCP succumbs to the nudges from shareholder activist and prominent investor William Ackman. They reason that Johnson would similarly transform the low-retail customer experience into something resembling an Apple store in over 1,000 JCP stores across the country.

Johnson was supposed to bring the secret code to the magic of Apple. He brought revolutionary transformation to JCP, eliminated traditional discounting pricing, and altered the buying experience by setting up stores within stores. He instituted change in Apple-like ways.  Just as Jobs would do, he avoided detailed, quantitative marketing research and analysis.  Just like Jobs, based on experience and hunch, he decided that he could determine what customers want and decide how stores should be designed and structured. Jobs used to say customers aren't sure what they want, so he should determine that. Johnson approached JCP's customer base similarly.  

Two years later, JCP seems to be in a financial quagmire, a retailing mess.  The stock price fell from about $37/share to less than $14/share in the past year.  Sales last quarter fell over 20%, and the company has announced losses and management change. The bleeding had to stop immediately. It even decided to invite back former CEO William Ullman, as if it will contemplate a reversion back to the old JCP.

Marketing gurus and analysts will ponder this in the time to come and try to figure out what happened, why Johnson's strategy crashed, and why consumers who flock to whatever is new at Apple were turned off by Johnson's store changes and redesign. Business-school professors will decide this is a timely, significant case to study retail strategy, marketing management, and consumer behavior.

But there is a finance element to what happened.  The change was triggered by a large equity shareholder, activist Ackman.  He thought complete, rapid transformation was the best way to boost sluggish shareholder value. The company had--at that time--manageable debt loads, substantial amounts of liquidity and cash, and sufficient amounts of cash flow from the 1,000-plus stores to plow back into the business. Sales growth seemed to have stalled, mostly a result of consumers' reluctance to spend during and immediately after the recession.

The best way to get sudden boosts in stock price, he likely figured, was to make substantial changes in management and business strategy, while keeping the balance sheet stable.   The best and most popular choice would be someone who had that Apple magic.

Now with recurring losses and dwindling levels of cash, corporate-finance advisers may need to step in to determine clever ways to manage what could turn out to be a bothersome debt burden.

(Some will argue the company was distracted by current litigation related to Macy's and Martha Stewart. This might have been a thorn in management's efforts in the short term, but would not likely have proven to be the difference between soaring growth and sorrowful losses.)

JCP, Ackman, and Johnson all combined to take a significant business risk. Perhaps they should be and will be applauded for that. But somehow it didn't work. Or for the first two years, it didn't work.  Given time, it might have taken off later, or it might have eventually "clicked" with customers, or the company might have discovered a new, different customer segment to enjoy the different, more flamboyant in-store experience. 

Perhaps it pushed too hard, too fast. For now, marketing MBA students will have a chance to scrutinize what went wrong and why.  Finance MBAs may get a chance to study whether the strong voices from large activist shareholders can steer an old company that needs a swift kick, but does so in the wrong way.

Tracy Williams

See also:

CFN: Apple's Stash of Cash, 2012
CFN: Dell Going Private? 2013