Can J.C. Penney Inc.'s New CEO Maintain the Turnaround?
The new CEO picked to lead J.C. Penney has an unenviable task in front of him: Not only is the department store chain still in the midst of a turnaround -- and offering guidance that failed to impress Wall Street -- but he must also carry the baggage from the last time the company went outside the industry for leadership. That move itself nearly bought J.C. Penney to ruin.
A DIYer to lead the rebuilding
J.C. Penney's board has selected Marvin Ellison, a Home Depot executive who served for 12 years as head of the home-improvement retailer's U.S. store operations. Prior to that he worked for 15 years at Target in a variety of operational capacities, and possesses a wealth of knowledge and experience in supply chain management.
While many analysts are calling this a conservative choice because of Ellison's focus on operations, it's still eerily similar to the choice J.C. Penney made in plucking Ron Johnson from his gig as head of Apple's retail stores.
Like that childhood game of noting the striking similarities between the assassinations of Presidents Abraham Lincoln and John F. Kennedy, there's more than a passing resemblance between the appointments of Johnson and Ellison.
- Both were former executives at Target
- Both had been seen as heirs to lead their respective companies before being passed over for another candidate
- Nov. 1 was the date Johnson was appointed and will be the day Ellison comes on board
- Myron Ullman, the man in charge at the time of both executive's appointment, kept the main reins of control during the transition
- The company's stock jumped after each announcement
The same, but different
Despite such superficial similarities, the tasks assigned to each executive couldn't be any more different.
Where Johnson was brought in to transform the retailer so that it could survive in the digital age and appeal to younger consumers, Ellison's role seems basically to not muck up what is working and keep a steady hand on the tiller. And while Ullman handed the reins to Johnson after just three months on the job, Ellison will have an extended period of tutelage and won't assume the CEO role until August of next year.
Still, as J.C. Penney is continuing its turnaround effort and faces significant macroeconomic challenges, not to mention those within the company itself, it's not certain that a "safe" choice is what's needed here.
Upending the apple cart as Johnson did certainly didn't work (a more measured response that included testing ideas in smaller markets before rolling them out nationally would have been better), but playing it safe also gives the impression that J.C. Penney doesn't intend to advance much further than it has already gone.
The safe choice
Yet The Wall Street Journal noted that this sort of move is something of a trend these days, with both Target and Gap choosing new leaders who are respected for their organizational skills rather than marketing prowess. Ellison was responsible for more than 2,000 stores at Home Depot, twice as many as J.C. Penney operates, so he's got some idea about how a large brick-and-mortar operation should work.
Still, just as layering on the "Apple experience" atop an old-line retailer was a shock to Penney's system, there's some skepticism about whether applying what works with nuts and bolts can similarly succeed with clothes and handbags.
Can someone with limited merchandising experience help the department store chain to flourish when merchandising is its lifeblood? J.C. Penney did try out an individual who was seemingly all about marketing and that didn't work out so well, but maybe what the department store chain really needs is someone who can straddle both the merchandising and operational worlds.
Handed the reins of an improving retailer
Ullman has done a remarkable job in bringing J.C. Penney back from the brink. Sales have recovered modestly, traffic is much improved, comps have turned positive -- three straight quarters, in fact, following nine consecutive quarter of negative comps -- and it's on the path to be free cash flow positive by year-end.
Although he will be the first to admit there's a long road ahead, Ullman substantially improved the retailer's engagement with its customer base.
Traffic is still negative, however, and the company continues to record losses, but liquidity is better, market share is growing in a number of categories, and Penney has a road map to follow for the next few years.
Success breeds success
There is some sense to the pick. At Penney's analyst day conference last week, the retailer unveiled a new mobile website and a new mobile shopping app for the iOS platform (an Android version will be available in 2015). It pointed out that by the end of this year, traffic at its mobile site will outpace that from desktops and tablets combined.
Online sales have been a strong component of J.C. Penney's recovery, with sales last quarter hitting $249 million, a 16.7 % increase from the same period of 2013.
Ellison helped integrate Home Depot's e-commerce system with the company's physical locations, enhancing customers' ability to buy items online and pick them up in stores.
Employment management and logistics are also a key component of keeping J.C. Penney on track, and there, too, Ellison was essential to Home Depot's ability to manage its workforce, making sure employees were on the floor instead of stocking shelves as they had been under former CEO Bob Nardelli's disastrous reign, and leading the drive to hire tradesmen once again.
Ellison has also been credited with expanding the big-box store's appliance section. In 2002, Home Depot had just a 4% share of the appliance market, badly trailing industry leader Sears Holdings' 40% share and the 10% share held by rival Lowe's . Last year, Sear's dominance had withered to a still-leading 29% share, and while Lowe's remained ahead with a 19% piece, Home Depot had seen its own share grow to 12%.
So where Sears lost 28% of its lead and Lowe's gained 90%, Home Depot tripled its market share.
A "back to basics" pick
In short, there's reason to be hopeful with J.C. Penney choosing Marvin Ellison. He has depth of experience in retail, albeit not in the strengths the department store plays to; he knows how to run a large, sprawling operation, one that is even larger J.C. Penney's; and he shores up the deficiencies the turnaround has thus far exhibited while not presenting any signs he'll upset what is already working.
Sometimes taking a defensive position is entirely warranted and allows the rest of the team to catch up with the parts already ahead. Certainly risk abounds, just as when Ron Johnson was thought capable of bringing a stodgy retailer into the 21st century, and time will obviously tell whether it was the right choice. But investors have good reason for optimism that this CEO choice will prop up the gains made rather than tear down the good works around them.
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The article Can J.C. Penney Inc.'s New CEO Maintain the Turnaround? originally appeared on Fool.com.Follow Rich Duprey's coverage of all the retailing industry's most important news and developments. He has no position in any stocks mentioned. The Motley Fool recommends Apple and Home Depot. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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