The Demise of JC Penney
With the push-out of JC Penney's (JCP) CEO Ron Johnson, the once-lauded genius behind Apple's (AAPL) stores who joined the retailer less than two years ago, we see the submission to the failure of his turnaround efforts.
However, this stands in stark contrast to the investor enthusiasm when Johnson first laid out his turnaround case —a lesson of 'irrational exuberance' we should keep in mind when thinking about turnaround prospects, in retail, tech and beyond. As I noted back in "Inside the Madness" post in January 2012, the enthusiasm for Johnson (particularly around the analyst day at the end of that month) was too early –and it was necessary instead to see SOME traction before the stock was investible.
We, of course, instead got worsening trends accompanied by a stock down 50 percent during Johnson's tenure. From question marks surrounding store-within-a-store, the Martha Stewart trial, the back-and-forth between coupons and every day low price (EDLP), the company could not catch a break as comparable store sales dipped below 20 percent. Yet many analysts remained positive through the majority of 2012.
Interestingly, Bill Ackman of Pershing Square, insisted on patience with JC Penney, which seemed to sound more like pushed-back excuses, particularly as he was urging for immediate changes at Proctor & Gamble (PG), a company that—in fact—was able to return to innovation and regain some lost market share from its more bloated brand lineup.
The excuses because too frequent. While Ackman has seen success with names like Canadian Pacific (CP), JCP's failure is another black eye for the activist, who has been in the spotlight contra Carl Icahn in the dispute over Herbalife (HLF), a battle that has transcended fundamentals to become a personal battle of personality and liquidity. The emotions surrounding Herbalife have reached a new height when the stock was halted for an extended period this morning over a change in auditor—something that ultimately doesn't seem to have much of an impact.
Of course, retail turnarounds are not impossible.
On Mad Money, we have highlighted Pier One (PIR), Ascena (ASNA), Chicos (CHS), and Gap (GPS). However, when a brand is diminished, it is tough to recover. Certainly there are the great retailers of our time—Costco (COST) founder Jim Sinegal, Mickey Drexler of the now-private J.Crew and previously Gap, Howard Schultz of Starbucks (SBUX), Frank Blake of Home Depot (HD), or Manny Chirico of Phillips Van Heusen (PVH)—have some clues on how to do this the right way. But, ultimately JC Penney seems to be—in my view and the view of many—a textbook case of how to do it… well, wrong.
So what do you do with the stock here? Well, it's on sale just like everything else in JC Penney's stores. But as we've seen, a sale isn't always intriguing. The ability for this stock to turnaround is questionable. Particularly with the "back to the future" strategy bringing back former CEO Mike Ullman. Question marks abound, as we have become used to with this name. Not to mention continued worries over the cash flow and debt levels.
Hey, at least Alcoa (AA) had positive comments about the market last night—especially end-markets like aerospace (we haven't seen Boeing go down despite Dreamliner issues!), autos, and construction… And there was even positive commentary about China (with positive economic data overnight to boot), where many have been worried about the slowdown in the region.
Of course, to hear these tidbits, that would mean you would have had to analyze the conference call while watching the Louisville vs Michigan game last night. #nerd. For Alcoa, despite improving trends, the stock remains in Rodney Dangerfield territory, not seeing any love, as Cramer noted this morning on Squawk on the Street. Perhaps we need to see the company shift to more specialty and away from commodity, a la what PPG Industries (PPG) did in the chemicals space, something Chuck Bunch has highlighted in his Mad Money appearances. The materials, the laggards of the first quarter of 2013, are showing some traction at last. But, ultimately, Alcoa is a lot less exciting than JC Penney and Herbalife.
The bottom line: Retail turnarounds are difficult. The enthusiasm the analysts, and Ackman, held at the beginning of Johnson's tenure was misplaced. And even now, with the stock right here, I wouldn't be a buyer particularly as there are better spots in retail including the off-price category like TJX (TJX) or best of breed department stores Macys (M) and Nordstrom (JWN). It certainly isn't an auspicious start for the next stage of JCP with the stock down about 10 percent today. Beware of enthusiasm too early on when it comes to turnarounds. And even down here, I wouldn't buy JCP.