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When a business does well, an extra-large share of the credit rises up toward the C-suite; when it does poorly, the buck often stops there as well. So as we start the new year, it's a good time to consider which CEOs we should be keeping our eyes on. In the view of Motley Fool Chief Investment Officer Andy Cross, two in particular are intriguing, in two very different situations. Lawrence Culp recently took on the top job at General Electric (GE 3.83%) -- the first outsider ever to do so -- and he'll have his work cut out for him to turn the ship around.
On the other hand, Cross foresees another great year for Mary Dillon at Ulta Beauty (ULTA +0.97%). In this segment of the MarketFoolery podcast, he and host Chris Hill talk about these leaders, their companies, the difficulties they'll face, and the advantages they enjoy.
A full transcript follows the video.
This video was recorded on Jan. 8, 2019.
Chris Hill: Who were the CEOs you're watching?
Andy Cross: It seems like we talk about General Electric a lot on the show, but Lawrence Culp, the new CEO at General Electric, is one that I'm really interested to watch. They've gone through various CEOs over the last year. A little bit of a surprise when the last CEO was kicked out after some of the initiatives that he was making. We've talked about this on the show. Larry Culp comes from Danaher here in D.C. That's a fabulous operator. He ran that organization for more than 10 years and did really well. He stepped down just to take some time away.
It'll be very interesting to see how he takes the reins at General Electric. They're spinning off their digital business, they announced. I'm really interested to see. This is a legendary business that has so struggled. At $70 billion, it's a company that's fallen from grace. Someone with the talents of Larry Culp, to get the operating units going, their strength, I'm interested to see if he can actually deliver on that.
Hill: A year ago at this time, one of the people we talked about was John Flannery, who at the time was the CEO of General Electric. I, among others, was praising Flannery for how clear he was being with Wall Street. He was so open about, "This is what we're doing. There are no sacred cows at this company. Everything is on the table." And now, as you were talking, I thought to myself, "As clear as he was communicating with Wall Street and with analysts, I wonder if, in hindsight, he maybe should have done a little bit better job hand-holding the board of directors." They couldn't fault him for being opaque. He was very clear. "This is what I'm going to do." I was surprised when he got cut loose in the middle of the year.
Cross: We looked at General Electric earlier. On one of our services, we shorted it a little bit when the stock was around $15. Now, it's around $8. When you think about the challenge that Flannery had in front of him, and the way that he was going about that, I thought, "This is a guy who has lots of success inside the General Electric family, who could get this ship going in the right direction, making the changes that people have been talking about for a while." It just seems, like you said, the board wasn't behind that. And at some point, when the last straw hit the camel's back, the board just didn't seem to be aligned with where Flannery was taking the business or talking about taking the business. They thought that was just a little bit too much for General Electric. And they went toward Larry Culp, who's pretty new to the General Electric business.
Hill: I'm glad you used the phrase "the GE family" in reference to John Flannery, because that's something to be noted about Larry Culp. This is a guy coming from outside the company. It's not to say that's either good or bad, but it is notable. I think it's going to be very interesting to see what Culp does.
Cross: General Electric for years and years has talked about their management discipline, going all the way back to Jack Welch, grooming these great managers. I think we've seen over the last 10 years, that may not really be the best way to characterize that, when you think about the long term. Or, maybe the business was just so dramatic and so big that it's hard to turn, especially with the disaster the Financial business turned out to be.
Larry Culp comes from Danaher, where they have their Danaher business system. That's an operating philosophy that's worked well for Danaher when it comes to acquiring businesses, turning them into profit machines, reallocating that capital. If that's the way that General Electric is going to go, and focusing on their core businesses, that might be the way to get General Electric out of this deep rabbit hole that it's in right now.
Hill: If Larry Culp is not on the hot seat, let's just say it's a little warmer than the average CEO's. Are there other CEOs that you look at and you think, "I'm keeping my eye on them, I think they're poised for a great year."
Cross: The likes of a Larry Culp and Elon Musk, we love talking about those in the media as they're struggling. But there are definitely CEOs out there that are doing so well just from a day-to-day, continue to grow that business. Mary Dillon at Ulta is one of those. She's proven to be an exceptional CEO of that retailer of cosmetics. The way that they add to their stores, renovate stores tactically, will shift their real estate. How they have pushed the online business to be a bigger driver, how they have used their membership rewards now to be able to drive so much more value on a per-member basis, and make use of a footprint at a big box retailer that's fairly large. In the face of the likes of Amazon and other retailers that are continuing to hunt at Ulta, they have been able to continue to grow and grow pretty nicely. It's exceptionally profitable for a retailer. And, they use that capital very well and have very high returns on that capital. Every dollar they're investing back in the business continues to become more and more valuable. Mary Dillon does get some respect, but she's not a household name, and she should be.
Hill: Particularly when you consider that, for the stretch of time that she's been in the corner office, you mentioned the salon business, Ulta was doing very well in that. I'm sure there were at least a couple of people in her lieutenants who were like, "No, let's keep going here." The decision to really push the online business was a smart one. This was not a business that needed turnaround. This was a successful business. And she was not in any way satisfied with that. She said, "No, we can be doing more to grow this business."
Cross: That's very apropos, when you say she was not satisfied. When she came in, she had the membership media experience from her previous roles. She brought that, infused that into Ulta, used that as a new focal point for them to be able to grow their sales per square foot from focusing on the more profitable members tied to their membership business and using that as a catalyst to drive the online business, as well. They've mastered that. In some ways, that omnichannel presence has been able to keep the cosmetics competition and retail competition at bay. And, they've also been able to strike up really great partnerships with exclusive brands like Kylie Jenner as well. That's been another way to keep Ulta front and center when it comes to their members when they want to use, test, and buy cosmetics.
