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After CEO Jumps Ship, Can J.C. Penney Stay Afloat?

By Rich Duprey – May 30, 2018 at 9:12AM

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It doesn't look good at first glance, but this might be just what the department store chain needed.

It had to be an easy decision for J.C. Penney (JCPN.Q) Chairman and CEO Marvin Ellison to make: stay at a floundering, though still solvent, department store chain or jump ship to a financially strong and growing home-improvement center, a business that you're intimately familiar with? That Ellison chose the latter to become president and CEO of Lowe's (LOW 0.01%) was a gimme.

But the move throws into question the fate of J.C. Penney and whether it can survive. It's not that the loss of Ellison is so critical, but rather what it signals about the future of the department store chain.

A female J.C. Penney customer talking to a male employee while claiming merchandise she ordered online

Image source: J.C. Penney.

Stay the course

Ellison was brought on as a steadying hand following the short but tumultuous tenure of Ron Johnson. Interim CEO Mike Ullman wanted shareholders reassured that the retailer would be entering a period of calm following one of disastrous upheaval and that the policy prescriptions he had implemented would be carried out.

And Ellison did an admirable job of that. As J.C. Penney noted in the press release announcing his sudden resignation, his contributions included retiring $1.4 billion in debt, renewing and enhancing its revolving credit facility, and significantly strengthening the retailer's financial position. But all that was begun under Ullman; Ellison just had to make sure he didn't screw things up.

The biggest items that have led to the resurrection of J.C. Penney as a viable retailer were all started by Ellison's predecessor. It was Ullman who originally partnered with beauty care and makeup giant Sephora; it was Ullman who relaunched the company's home department; and it was Ullman who restored couponing and special pricing in the stores. Those initiatives are the ones mostly responsible for J.C. Penney surviving, though Ellison can be credited with expanding many of those strategies.

For example, Sephora's relationship with J.C. Penney was extended earlier this year to 670 stores and Ellison announced the department store would be upgrading and rebranding 100 salons to Salon by InStyle, the women's monthly fashion magazine.

Salons have been a profitable fixture for J.C. Penney for decades and account for almost 5% of total sales. The typical salon customer visits a store eight times a year, twice the number of non-salon customers, and they spend twice as much. Capitalizing on this is a smart move, and indicates the kind of continuity Ellison provided, but other than bringing back appliances -- something he did when at Home Depot, too -- there have been few major new initiatives of his own.

Not a good look

If perception is reality, though, then Ellison's sudden departure does not bode well for J.C. Penney. After initially coming back strong, the retailer has stumbled hard for the past few quarters, coming up way short of the performances put in by rivals like Macy's and Kohl's.

It also faltered badly in the fourth quarter when it suffered "supply chain and process issues" that prevented it from shipping holiday orders properly from its distribution centers, forcing it to slash prices and liquidate certain merchandise, which in turn pressured margins. Jumping ship at this time gives the impression Ellison was leaving while the gettin' was good.

Yet because Ellison was not a "big-ideas" executive, seemingly happy to nudge J.C. Penney incrementally forward rather than have it move by leaps and bounds, his replacement can still effect positive change. Perhaps not in the wholesale way Ron Johnson tried, but some bold initiatives to get the retailer moving ahead more broadly is what the business just might need.

Time for new ideas

Not everything Kohl's is doing might be right, such as partnering with, but it's trying to move the needle with some unique ideas. It also just announced a partnership with digital media site PopSugar to style and curate a clothing line for millennials. J.C. Penney needs to dynamic new ideas.

Companies prefer orderly transitions in leadership, and Ellison suddenly bolting for the door gives the impression J.C. Penney's predicament is worse than it appears. If the retailer can bring in a new leader willing to be bold, then this could be a positive development for the department store chain. 

While the optics of Ellison's departure are not good and give the impression the future for the department store chain is not very bright, this might be an opportunity for a contrarian investor to pick up shares very cheap.

Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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J. C. Penney Company, Inc. Stock Quote
J. C. Penney Company, Inc.
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