The media was full of stories about the unexpected departure of JCPenney (NYSE: JCP) president Michael R. Francis. Nearly everyone who watches the retailer wonders how a man with his background — a former senior executive at Target (NYSE: TGT) — and a pay package of $44 million could be kicked out so quickly.
The Francis incident, JCPenney’s share price, its same store sales fall-off, combined with large impatient shareholders, mean new CEO Ron Johnson’s tenure will be short.
JCPenney’s same-store sales dropped 20% in its most recently reported quarter. That is the kind of plunge most large retailers cannot survive — at least if their shareholders want to own stock in a company that can make money. Among the reasons that JCPenney likely will not rebound is that its competition, which includes retailers led by Macy’s (NYSE: M), have taken too much of the market and have developed strategies to take more. JCPenney operates in an environment that includes more than a half a dozen larger store chains. Each has better supply lines, brands and sales growth. And U.S. retail sales growth is modest enough that the overall market is not rising particularly fast.
Johnson’s greatest enemies are the two large shareholders who effectively control the company. Pershing Square owns 17.9% of JCPenney’s common shares. Its CEO, William Ackman, is on the JCPenney board. He has a track record as an impatient investor. Vornado owns 10.7% of JCPenney’s common shares. Its CEO, Steven Roth, is also on the retailer’s board.
Vornado and Pershing must have expected that Johnson — Apple’s (NASDAQ: AAPL) former retail chief — was almost certain to turn JCPenney around. He announced a radical overhaul of the way that JCPenney would approach customers just after he took the job. As he did so, the shares of the retailer rose. After the news of the departure of Francis, the stock reached a 52-week low of $23. That is down from a 52-week high of $43.18. It would be hard to find a CEO of a large public company who could survive that kind of blow.
The trouble the JCPenney board faces is where to turn to find a replacement for Johnson and how badly Wall St. will punish its shares when it brings in a new CEO. But the board has no choice now. Johnson has proved after a very short time that his approach to fixing JCPenney is poison.
Douglas A. McIntyre