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Looking Back at Ron Johnson's J.C. Penney

By Michael Lewis - Apr 9, 2013 at 4:30PM

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A longtime bull confesses his mistake. But before we toss Johnson to the side, let's consider what he did for the company.

By my own count, I have written five articles in the last 12 months regarding beleaguered retailer J.C. Penney (JCPN.Q). My general thesis was that Ron Johnson, former Apple retail executive, was the saving grace of the company and needed to be given a few years to conduct one of the biggest reorganizations ever for a public company. Well, that year's worth of content was shredded to pieces on Monday as Johnson is officially out the door at J.C. Penney. Before I admit defeat on this long-defended thesis, let's highlight the (few) good things that happened.

Legacy'd
Upon Johnson's hiring in late 2011, J.C. Penney was a bloated mess of a company with ancient legacy systems costing billions every year. Johnson attacked this head-on, and the company announced it was on track to deliver $900 million-plus in savings. Inventory levels were cleaned up, old POS (pun intended) systems were thrown out, and J.C. Penney became a relatively innovative retailer, especially among dinosaur department stores.

I don't think many executives could have done this with near the efficacy and precision that Johnson did, and he should be commended for it. Did it save the company? The truth is we still don't know. The past year's results have been dismal and hard to swallow for bulls and bears alike, but the cost-saving effort has left J.C. Penney able to focus its (dwindling) cash hoard on acquiring new brands and attracting customers -- even if the latter have yet to materialize.

The famed, ill-fated concept
It will be very interesting to see if Mike Ullman, former and now reinstated interim CEO, keeps the company on its "store of stores" track that Johnson fathered. I still believe this is the company's greatest shot at regaining relevance in the retail world. J.C. Penney has suffered from a home goods section that resembled your great-grandmother's attic and clothing styles that Bill Cosby wouldn't even touch. It needed the refresh that Johnson envisioned and began to create. His error was in the execution.

Where Johnson went wrong was assuming he could wean customers from the deep-discount model overnight, and simultaneously bring in the new cool kids who had their parents' credit cards. None of that happened.

In its extremely abrupt shift (and subsequent waffle), J.C. Penney alienated its elderly, bargain-hunting customer base without having tapped into its new target demographic. This left the store with approximately zero supporters while the company spent billions revitalizing.

The sad part is, the revitalization is working. Sales per square foot figures in renovated stores are substantially higher than in the traditional ones. This was all just done in the wrong order, and Johnson paid for that error with his job (and a slice of dignity).

The future of JCP
The company will likely trade for the lowest prices we have ever seen it in coming days, but I can't in good conscience recommend the value buy. I wholeheartedly thought we would see Ron Johnson beat this dead horse back to life, and I was wrong.

I hope that in the coming months and years, Johnson's early efforts yield more fruit and the company can shift course away from the rocks. As for right now, join me in mourning.

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