Three troubled major retailers just got new CEOs or are about to, but investors are right to wonder whether the businesses are far too damaged for a fresh face to make a difference at this point.
J.C. Penney ( JCPN.Q ) hired a former fabric and crafts store executive; Bed Bath & Beyond ( BBBY 0.42% ) added a former Target executive; and Gap ( GPS -0.17% ) stunned everyone last week when it abruptly announced it had fired its CEO right in the middle of a big corporate transformation.
Considering the condition of retail generally, and these three retailers in particular, new executives might not be enough to salvage them.
The new ghost town
The department store is no longer a particularly relevant way to sell merchandise. As Warren Buffett noted a couple of years ago, "The department store is online now." While J.C. Penney finally moved online in earnest a couple of years ago, that hasn't been nearly enough to revive the retailer that is still heavily dependent upon its brick-and-mortar footprint.
Jill Soltau, who came from Jo-Ann Fabrics, has been tasked with pulling the department store chain back from the brink. It has lost nearly 97% of its value over the past decade because -- to borrow a phrase from Benjamin Franklin -- the retailer is like a keg tapped at both ends: Internet rivals are siphoning sales from one end; discount physical retailers like Burlington and TJX are at the other, taking away the bargain shoppers.
Moreover, mass merchandisers like Target and Walmart learned to thrive in the new environment, even becoming potent online retailers in their own right.
While that should bode well for J.C. Penney to make the switch, too, there are more arguments against it succeeding. The department store carries $3.6 billion in debt, making it difficult to maneuver, and there are few reasons for customers to shop at Penney anymore (or Macy's and Kohl's, for that matter). It remains saddled with 850 stores across the country, a heavy legacy that will weigh down performance, and it has been forced to try gimmicks.
A barbershop, "lifestyle" classes, and fitness classes won't make it a destination location. "Experiential retail" has become a cliche, a refuge for companies when they've run out of ideas to get customers to actually shop their stores. Penney's embrace of the concept is more an indication it's at the end of its rope, and investors would do well to steer clear.
Beyond any hope
Bed Bath & Beyond squandered any hope of resurrection when it chose to rest on its laurels after the demise of Linens 'n Things, delaying investing in any real e-commerce capabilities until it was almost too late. Then it jumped into hurry-up mode and began a bizarre acquisition strategy that compiled an amalgam of disparate businesses: Cost Plus World Market, Chef Central, online flash-sales retailer One Kings Lane, and personalized tchotchkes site PersonalizationMall.
None of it stopped the hemorrhaging of its customer base, and it was forced to rely upon its ubiquitous discount coupons to get them through the door. And even that became less effective over time.
A trio of activist investors finally mounted a campaign to wrest control of the company from its founders, who controlled Bed Bath & Beyond's direction. Their successful effort led to a complete overhaul of the company's executive team and board of directors. It now has a new CEO, Mark Tritton, the former chief marketing officer at Target, who arguably has the best chance of succeeding out of anyone.
There is still substantial brand value left in Bed Bath & Beyond's name, but the corporate neglect may have gone on too long, and its customers may have been trained too hard to rely upon coupons to make a difference. Cutting off the discounting lifeline could very well drive away the last vestiges of its customer base.
Selling off businesses, as management contemplates, is certainly a good start. and Bed Bath & Beyond's operations still throw off significant free cash flow. It alone may have sufficient resources to give it time to make the changes necessary. But with almost all of its merchandise just a click away, there seems little reason why a customer would choose to go there.
A great divide
The transformation of Gap looked to be well underway with the looming spinoff of Old Navy, but the decision by the jeans and khakis retailer to fire CEO Art Peck has thrown the entire process into doubt. A replacement will need to be found, but there might not be enough business left to make the retailer viable again.
Gap's board said its third quarter was going to be another poor one, with same-store sales down once again companywide, falling 7% at its namesake chain -- and, perhaps more surprisingly, falling 4% at Old Navy, the third straight quarter they've been negative. The discount clothing store had been the one bright spot in an otherwise long slog down for the retailer, but its deteriorating performance likely jeopardizes its spinoff.
For the company as a whole, though, the across-the-board degradation of its performance indicates Gap may be a permanently damaged brand. Like the others discussed above, what Gap offers is no longer distinctive with numerous options online and off. While Peck's transition of Old Navy to a fast-fashion house had extended its useful life by many years, even that seems to have run its course.
Gap's biggest problem may be its reliance upon shopping malls, which -- like department stores -- are seeing less and less traffic. Store closures are running at record high levels, and mall operators are considering bailing out ailing tenants to ensure they don't go under and leave vacant space in their wake.
With all of this happening at the same time as Gap heads into the all-important holiday shopping season, it does not bode well for the company, even if the CEO position is quickly filled. There's likely not much that someone stepping into this position can do to change the direction this once-innovative and leading retailer is heading.