J.C. Penney exposes inefficiency valuing CEOs

April 9, 2013

By Richard Beales

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The debacle at J.C. Penney exposes a glaring inefficiency in how the market values corporate chieftains. When the struggling U.S. retailer hired Apple whiz Ron Johnson in 2012, the company’s equity value spiked by more than $1 billion. On Monday evening, news of his departure added $350 million. The return of ex-Chief Executive Mike Ullman – the man Johnson replaced – swiftly erased some $700 million. Such big swings make no sense.

Less than two years ago, Johnson was given a savior’s welcome. Bill Ackman, a board member and hedge fund manager whose Pershing Square Capital Management is J.C. Penney’s biggest shareholder, championed the recruitment and touted Johnson’s retail success at Apple and Target. Apple, in particular, always looked a shaky comparison. J.C. Penney lacks the desirable products, focus and brand image of the iPhone and iPad maker.

As it turns out, J.C. Penney’s shares are trading at less than half the price they were when Johnson took over. A year and a half isn’t long enough to forge a major turnaround. Even Ackman, though, realized things weren’t going well. He bluntly acknowledged the problems at a conference last week.

Even if Johnson’s ideas had been the right ones, big organizations with entrenched people and cultures are hard to turn around. That made the market exuberance for his arrival excessive. By the same token, the large discount applied to Ullman’s second attempt is probably overdone.

Part of the rap against Johnson is he tried to do too much, changing sale policies and alienating traditional customers. In that sense, a blast from the past might not be so bad. Although Ullman’s seven-year tenure cost J.C. Penney 15 percent of its value – as Ackman liked to point out – the pressure from online rivals, the intervening recession and the more dramatic decline under Johnson make that record look less bad.

J.C. Penney, now a $3.1 billion company, has struggled to keep up in a challenged industry. That may be where Ullman can help. If anything, the fickle market has provided him with one advantage over Johnson: low expectations.

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A lack of products, focus, and brand image are serious weaknesses for any company. A CEO has to be flexible and willing to use test marketing strategies. Johnson was neither. I would suggest that the European firm Migros look at at Penney as an acquisitions candidate.

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