J.C. Penney (JCP): Three Reasons The Company Is Living on Borrowed Time

J.C. Penney Company, Inc. (NYSE:JCP)
announced yesterday that CEO Ron Johnson was stepping down from the helm of the beleaguered discount retailer, naming former top executive Mike Ullman to take his place and return to the position he held from 2004 until Johnson’s hire in 2011. In response, the shares fell more than 12% today, extending a decline that has lopped 60% off J.C. Penney’s stock price in the past year.

Despite the rising chorus of calls for Johnson’s ouster, investors clearly agree that J.C. Penney’s move today isn’t the right answer. Here are three reasons why.

1. Meet the new boss — same as the old boss.
Trying something new only to have it fail is always discouraging. But it’s even more discouraging to see a company choose to throw away the entire past year and a half without learning any lessons from its failure.

To understand how big a step backward this is for Penney, you have to go back to 2011. At the time, it was struggling, having plunged like most of its peers during the financial crisis and then getting left behind in the economic recovery that lifted shares of most of its rival retailers. Activist investor Bill Ackman, who argued for a shakeup in J.C. Penney Company, Inc. (NYSE:JCP)’s management, noted repeatedly how Ullman failed to manage the company well and gave investors dismal share-price performance. It’s hard to believe that the best the company could do for leadership was to bring Ullman back. If he chooses to ignore the hard-won lessons that Johnson helped J.C. Penney learn, then it’ll be hard for investors to have any confidence that the retailer is likely to find a path out of its troubles.

2. Turning back isn’t an option.
Some investors likely believe by now that they’d be better off if J.C. Penney Company, Inc. (NYSE:JCP) had never strayed from its coupon-and-discount model in the first place. Even if they’re right, the company can’t assume that by returning to that model now, customers will come back.

Once-loyal customers who felt betrayed by Penney’s strategic shift largely fled to competitors. Some stepped up to upscale retailer Macy’s, Inc. (NYSE:M), which has seen a real revival in its business over the past year. Others likely went to fellow discounters The TJX Companies, Inc. (NYSE:TJX) and Ross Stores, Inc. (NASDAQ:ROST), both of which have executed very well by offering name-brand merchandise at deep discounts to normal retail prices. For Penney to try to win those customers back would take a huge investment, and even then, having been burned once, they’ll never have the same loyalty they once had to the retailer.

JCP Total Return Price Chart

Source: Retail Industry Total Return Price data by YCharts.