Where Ron Johnson Went Wrong

 | Apr 09, 2013 | 2:30 PM EDT
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A year and a half ago, J.C. Penney (JCP) plucked Ron Johnson out of Apple (AAPL) to take the top role at the languishing retailer. The decision came at the behest of its largest shareholder, Bill Ackman of Pershing Square, and the news triggered J.C. Penney shares to leap 18% in a single day. Johnson's performance at Apple -- literally taking the company from zero retail footprint to giving its retail stores the highest profitable per square foot -- had become well-documented. Prior to Apple, Johnson had also enjoyed a successful stint at Target (TGT). So who better to provide J.C. Penney with the initial injection of excitement and change that it so desperately needed?

On Monday we found out that, after 17 months, Johnson has been relieved of his duties. Bill Ackman was quoted as saying that the most recent company results had been "very close to a "disaster." J.C. Penney shares have lost more than 50% since Johnson came on board.

So what happened? I believe Johnson committed some very elementary mistakes, and that investors who understand them will learn not to fall for the "excitement" of a turnaround in future endeavors.

Mistake One: A Square Peg in a Round Hole

Johnson's first error was in superimposing what he did at Apple directly on J.C. Penney. Apple, as we all know, does no market testing. In fact, the late Steve Jobs firmly believed that consumers really didn't know what they wanted from technology, and that it was up to Apple to show them what they were missing.

That idea works with a smartphone; it doesn't work with a department-store mass merchandiser. But Johnson thought he knew better, so he took away coupons and aimed to turn the company into a lower-end Saks (SKS), which promotes the store-within-a-store concept. Johnson treated J.C. Penney shoppers the same way he'd treated Apple customers -- a fatal mistake.  

Mistake Two: Alienation

By failing to understand the J.C. Penney customer, Johnson committed what I believe to the most fatal, disastrous mistake of all: He angered his consumer base. In any business, but especially in retailing, that is absolutely a death sentence. J.C. Penney shoppers are folks who are passionate about getting value for their dollar. When Johnson took that away, he alienated loyal customers. Sales for the latest fiscal year dropped by 25%, or more than $4 billion.

* * *

J.C. Penney has now hired Myron Ullman, the CEO whom had previously been replaced by Mr. Johnson to help save the day. I think that's a clear sign of the mistakes made. While Mr. Ullman has no plans to revert J.C. Penney to the ways of old, I think it's clear that his hiring is an attempt to inform investors and customers that the company does not want to lose its loyal shoppers -- and that, perhaps, it will revert to some of its tried-and-true tactics in order to make that happen. Some of Mr. Johnson's initiatives will likely remain, and they may yet prove to be very valuable. But the board clearly felt compelled to take immediate action or else risk losing another several billion in sales.

If Mr. Ullman can bring those customers back, J.C. Penney shares could be a nice buy at $14. But it wouldn't be because of a great turnaround story. Rather, it would be because the company is now finding a way to get its loyal shoppers back in the door while perhaps convincing new shoppers to take a look, as well.

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