Did Marvin Ellison leave JCP to become CEO of Lowe’s, fleeing the emergency room sensing Penney’s impending death, or did he take flight to a new and more fitting opportunity? His prior 12 years at Home Depot ended as EVP of Stores after he lost the race to the top to its current CEO Craig Menear. His move to Lowe’s might have been sparked by a competitive nerve, if not one of revenge.
Regardless, his opportunity is much broader at Lowe’s with a greater growth potential in a fairly healthy industry. Lowe’s is nearly six times the size of Penney in annual revenues, with a relatively low debt load. Furthermore, Ellison’s long tenure in the home improvement space, and particularly his experience as head of Home Depot stores can strengthen one of Lowe’s weak spots (customer service). Out of the gate he has some “low hanging fruit” for early improvements including ecommerce, which he boosted at HD.
In fact, based on the success Ellison had at HD, William Ackman’s Pershing Square Capital Management LP has built up a stake in Lowe’s of roughly $1 billion. Whoa!! Isn’t this the same guy who got Ron Johnson hired at JC Penney in 201l? The very same Ron Johnson whose vision I believe was correct to this day, but whose execution drove the company into a ditch (which some experts believe is unrecoverable)? Ackman lost billions on that bet. Is his support of Ellison an ominous “finger of fate,” suggesting this bet may signal disaster?
I don’t think so. Marvin Ellison is heading into a much more comfortable and familiar space where the likelihood of success is more easily achievable. But what about the fate of the ER patient he is leaving behind?
JC Penney’s Declining Decade
Following many years of acquiring businesses unrelated to the primarily apparel and soft lines-based retail business, JC Penney’s retail business started to decline by the mid-to-late-90’s, even while its drugstore chain, insurance, and banking services divisions were growing.
At the same time, I observed and wrote about the fact that during the 90s Kohl’s was directly competing with Penney for the business of 35-55-year-old working moms who did not have the time to drive to, and shop through the malls where JC Penney was anchored. Therefore, Kohl’s rapidly built out their fleet of freestanding stores in the neighborhoods where the working moms lived. The stores were also single-floor, with central checkout and big parking lots. Because of the advantage of convenience and ease that Kohl’s offered these time-starved moms, by some estimates they stole $5 billion in revenues from JC Penney during that decade.
In the fiscal year ending in January 2000, while JCP overall net sales increased 6.7 percent to $31.74 billion, the retail store sales actually fell 8 percent. The sales increase was wholly attributed to the Eckerd drugstore chain, which saw its sales increase 20 percent (at the time, Eckerd sales comprised nearly 40 percent of overall JCPenney sales). The proverbial tail was wagging the dog.
It became obvious to the JC Penney board that they needed a turnaround leader, and fast. In September 2000, Allen Questrom became the first CEO hired outside the company. His reputation as a turnaround artist preceded him, having previously led both Federated Department Stores, Inc. and Barneys New York Inc. out of bankruptcy. Over a four-year period, Questrom stabilized the business and launched some major initiatives: the centralization of merchandising, implementation of a national advertising campaign, and the renovation and modernization of the stores. He also got rid of all non-core businesses, including the Eckerd drugstore chain.
In 2004, with sales of about $18 billion, he passed the baton, then on a growth trajectory, to incoming CEO Mike Ullman. Ullman kept the business momentum forward to about $20 billion by 2007. But then in 2008, the decline in revenues and gross margin began and continued over the next three years as the economy crashed into the Great Recession. By the end of 2011, revenues had dropped to about $17.5 billion.
According to Mark Cohen, professor at Columbia Business School, “Ullman was able to prop up the bottom line with expense cuts (the catalog business was a casualty with no offsetting and meaningful investment in e-commerce).” Cohen also said, “Under Ullman JCP’s promotional balance of sale (percent on sale vs. regular price) went from something like 60 percent when he took over to nearly 100 percent.” The company’s profitability began a slow and steady decline. This took the stock price down from Questrom’s high in the mid to high $50 range to the mid $20’s.
It was during this period that historical and seismic decisions were made, indelibly and disastrously altering JC Penney’s business. Today, some experts believe the moves proved fatal and irreversible and it’s just a question of time before JC Penney will fail.
According to Cohen, the drop in the stock price in 2011 “opened the door to the two activists, William Ackman and Stephen Roth who essentially bought 29 percent of the company’s stock and co-opted the company’s board in doing so.”
On the plus side, during Ullman’s tenure he did bring Sephora into the stores. To this day they are the most productive business across all of Penney’s categories and are being expanded throughout the chain.
And Then Came Ron Johnson
By the end of 2011, with revenues and profits still declining and the activists essentially in control of the board, some sources say that Ullman reached out to Ron Johnson, who spearheaded Apple’s much-lauded retail business. Ullman would retain his CEO title but would eventually pass the baton to Johnson, or something like that. The reason I say “something like that” is because there are conflicting stories about how the Johnson hire happened. But regardless of the hiring process, Ackman and Roth were in the power seats and forced Ullman’s ouster and Johnson’s appointment as JC Penney’s new CEO.
On January 25, 2012, Ron Johnson presented his grand vision in front of some 700 VIPs in New York on a big stage. He explained how he was going to fundamentally transform JC Penney, both strategically and structurally. Essentially, he would immediately (without testing) wipe out price promoting across the board, eschew their highly effective private branding program for cool new brands, building streets of shops and a town square where young people could gather for events, and on and on. With his out of the gate elimination of price promoting, he essentially “fired” his core 35-55 year-old customers. On cue, they abruptly left, and the cool-factor nextgen consumers never replaced them.
Annual revenues were about $17.5 billion when Johnson took over in 2012, and crashed to about $11 billion when he was ousted in 2014. The company posted net losses of $795 million in 2012, $1.2 billion in 2013 and $717 million in 2014. Comparable sales in 2012 fell a harrowing 25 percent. The next year, the company added more than $2.5 billion in debt to its books.
If you are interested in reading the details of his 2012 on stage presentation, his vision and strategies, click here>>. You will see that I drank the Kool-Aid. But as I have said, I agreed with his vision of what the modern-day department store should be today. His implementation of the vision was simply horrific. And that’s an understatement.
Off Again, on Again Ullman
On the brink of death and with the organization in total disarray, Penney’s board decided they needed Mike Ullman to come back to stop the bleeding and bring a level of confidence back to the organization. Ullman did stabilize the business again and eked out another $1.5 billion in revenues, from $11 billion to about $12.5 billion. Then he brought Marvin Ellison in as CEO in 2015. Supposedly, now that Ullman stabilized the ship, Ellison would put it back on a growth trajectory.
Ellison From Take Off to Get Out
Ellison arrived with hope, determination, great leadership skills and three major strategies for “take off” to growth. He would focus on the private branding capabilities that Johnson had decimated. Providing differentiation and higher margins, he brought the margin of their overall apparel business back to around 50 percent. The second priority was to get the JC Penney omnichannel model up to a competitive level. And third, he would focus on increasing traffic and the average spend.
At the end of his first year, Ellison delivered. Revenues increased 3 percent to $12.6 billion. And he was on record stating they would reach net sales of $14.5 billion by 2017, Ellison’s third turnaround year. The $2 billion of new revenues would include $750 million in the resurgence of the home category, which had the largest decline in market share in sales per square-foot and jcp.com sales during the Johnson era.
Gross margin increased 120 basis points to 36.0 percent from 34.8 percent in 2014, while SG&A decreased $218 million or 270 basis points over the prior year. Ellison declared “low cost retail wins” at a Goldman Sachs retail conference in September 2017. He talked about driving supply chain efficiencies by investing in the “science” of retailing, creating a more efficient and effective supply chain, using analytics for sharper pricing strategies, lowering advertising costs and focusing on deeper penetration, and reducing the bureaucracy. However, his focus on cost reductions was a “reduce to reinvest” strategy to increase investment in marketing, omnichannel and technology for growth. Ellison’s plan was strengthened by his deep experience in all of these tactics from his tenure at Home Depot.
Adjusted EBITDA was $715 million, a $435 million or 155 percent improvement from 2014, and it beat the forecast of $620 million. A key driver of the positive sales results for 2015 was the 4.5 percent increase in comp store sales — a significant achievement.
For 2016, Penney upped its adjusted earnings forecast to $1 billion vs. its prior forecast of $900 million. And its three-year turnaround goal for 2017 was to reach $1.2 billion in EBITDA, which would enable Penney to service its debt, at about $4.5 billion, and pay for expenses. Another source of debt reduction could come from the possible sale/leaseback of its Plano headquarters.
Its adjusted net loss for 2015 improved by $463 million to $315 million, or $(1.03) per share. Free cash flow was positive at $131 million, an increase of over $74 million or 130 percent from 2014. For the full year, liquidity improved $900 million, of which $500 million was used to pay down debt during the fourth quarter. At year-end, liquidity was $2.5 billion compared to $2.1 billion last year.
For more detail on Ellison’s first-year performance and strategic plan, click here>>. So, what happened? They made a slight profit in 2016, but it was followed by a loss of $116 million in 2017. In 2016, Ellison barely moved revenues and in 2017, rather than the $14 billion in revenues he projected for 2017, they were stalled at $12.5 or $100 million less than when he arrived. Penney did post positive comp store sales in 2017, increased adjusted earnings per share by 175 percent, and reduced outstanding debt by $600 million.
However, overall, the business just slogging along, certainly not at wings up speed enough for take off. Then in 2018, Penney’s first-quarter numbers were worse. Revenues declined, comps didn’t move and they had a loss $78 million. Wow, what happened here? The ghost of Ron Johnson or something more intractable?
The Beat Goes On
With enormous cost cuttings, store closings, some debt reduction, and positive moves to expand Sephora, (which is the most productive category in the fleet), a determined effort to bring their once highly successful (a long, long time ago) home category back (including appliances and Ashely furniture, Empire floor coverings, etc.) and even with great strides in their omnichannel efforts, the growth needle is just not moving, at least relative to their competitors — excluding Sears, which hasn’t enjoyed the growth needle for a couple of decades.
All of which brings us back to the opening question: Did Marvin Ellison flee the emergency room sensing Penney’s impending death, or did he take flight to a new and more fitting opportunity, as he leaves to become CEO of Lowe’s?
The truth is, it doesn’t matter. What does matter is that JC Penney is critically wounded once again. And in this chaotic, fast moving, hyper-technological and hyper-competitive world, with a new consumer culture that just turns their backs on anything that isn’t new, modern and cool, JC Penney is stuck in the ER. If a brilliant surgeon is not found, and found quickly, we might be witnessing the demise of another iconic American brand.