Even Ron Johnson, a ringer from Apple Inc. (NASDAQ:AAPL)’s retail business, couldn’t step in to save the struggling J.C. Penney Company, Inc. (NYSE:JCP). Looking back on his tenure, many will question his choice to cut regular prices instead of promoting sales with little testing of the concept; whether he had enough time to prove himself; and if Johnson’s strategy would have been better than a now-undefined strategy. While these hypothetical questions are entertaining to ponder, there is one solid truth we can take away from his CEO stint, best summed up by none other than Warren Buffett: “Good jockeys will do well on good horses, but not on broken-down nags.”
Choosing all-star management
Management should be one of the first things an investor studies about a business. And seemingly, an investor would crave having Ron Johnson in charge of an investment. He created Apple Inc. (NASDAQ:AAPL)’s retail store experience, leading it to earn over $6,000 per square foot, the highest sales per square foot of any retail store in America. He seemed to be a retail guru, with heady quotes such as: “You have to create a store that’s more than a store to people.” But at that point, before taking over at J.C. Penney Company, Inc. (NYSE:JCP), he had earned the right to say such things. He owed the Apple Inc. (NASDAQ:AAPL) Store’s popularity to the fact that “the staff isn’t focused on selling stuff, it’s focused on building relationships and trying to make people’s lives better.”
But as important as management is, it’s just one piece of a business. Before Johnson took over, according to Pershing Square’s overview of the business, J.C. Penney Company, Inc. (NYSE:JCP)’s problems were excessive promotions, commodity products, a poor store experience, and a limited customer base. From 2007 to 2011, revenue fell 13% and earnings before interest and taxes fell more than 50%, making it the worst performer out of competitors like Macy’s, Inc. (NYSE:M), Kohl’s Corporation (NYSE:KSS), T.J. Maxx, and Nordstrom, Inc. (NYSE:JWN). New management would have its work cut out for it.
And the failing business wins
Even with great management, it’s difficult for a company with negative trends to break the momentum and turn around. Even with Johnson, J.C. Penney continued to hurt. Over the past year, revenue declined 25%. From earnings per share of $0.82 in 2011, J.C. Penney Company, Inc. (NYSE:JCP) lost $2.38 per share in 2012, and lost $2.51 per share just in the first quarter of this year. Turning around a troubled company isn’t easy, even for a great manager. And usually, the troubled company wins.
It could be that Johnson didn’t have enough time to pursue his strategy. Nobody came to Apple Inc. (NASDAQ:AAPL)’s “Genius Bar” in the first few years of its existence. But the difference is that Apple Inc. (NASDAQ:AAPL) could take the time to build up its retail arm. J.C. Penney Company, Inc. (NYSE:JCP)’s dire situation meant that any manager would have to act quickly. When even one of the most promising CEOs couldn’t help, it’s likely the business that’s at fault. As much as management is key to business, the business has to be able to be managed for profit.
As Buffett says, “When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.”
J.C. Penney Company, Inc. (NYSE:JCP) has been a train wreck whose comeback always seems just around the next earnings corner. If you’re wondering whether J.C. Penney is a buy today, you’re invited to claim a copy of The Motley Fool’s must-read report on the company. Learn everything you need to know about JCP’s turnaround — or lack thereof. Simply click here now for instant access.
The article What Ron Johnson’s Ousting Should Teach You originally appeared on Fool.com and is written by Dan Newman.
Fool contributor Dan Newman has no position in any stocks mentioned. The Motley Fool recommends Apple. 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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