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Is the End Near for JCPenney?

Troubled merchant JCPenney (JCP) last night announced that CEO Ron Johnson would be leaving effective immediately. The move comes at a critical time for the company.

During his short term as CEO Ron Johnson managed to alienate JCP’s former customer base before he was able to implement a plan to attract new shoppers. The results have been disastrous. During the critical fourth-quarter of 2012, same-store sales (revenues at stores open more than a year) fell by 32%. Roughly half of the 1,100 JCP store base has been updated to fit Johnson’s turnaround vision while the others are going through costly remodels. In human terms Johnson fired or laid-off 19,000 employees. The math works out to about 40 jobs lost every day of Johnson’s 15-month term.

Related: Ron Johnson's JCPenney -Anatomy of a Retail Failure

The clock is ticking on the 111-year old chain. If JCP runs through cash at the rate it has over the last 12 months the company will have no money on the balance sheet by sometime this summer, exactly at the time retailers need to maximize their borrowing to be in stock for the holidays.

If the new CEO can’t stop the bleeding JCPenney will be bankrupt by Labor Day. The question for investors and shoppers alike is who is the new boss and what, if anything, can he do to save the company.

The New Boss is Same as the Old Boss

The job of cleaning up the mess now falls to Myron Ullman, the very man JCP’s board of directors jettisoned to make room for Ron Johnson in the first place. Brian Sozzi, retail stock whiz and CEO of Belus Capital Advisors, thinks bringing back Ullman is a big mistake.

“JCP just took a step back in time in trying to bring back old school retailing 101 where you promote every weekend,” he explains in the attached video. Among the daunting challenges with going back to the old strategy is that JC Penney’s just spent 15 months telling its former customers they were no longer welcome at the hip new JCP.

Sozzi says Ron Johnson “essentially told the entire Baby Boom class ‘hey, you have a lot of spending power (but) we don’t want you.'”

The problem facing Myron Ullman is that he’s got half of JCP’s 1,100 stores partially remodeled, a customer base that has no idea what the store stands for anymore, and a massive amount of incoming inventory specifically bought to fit into the younger, hipper demographic Johnson was trying to woo.

Just for good measure Ullman also has a company rapidly running out of cash, having burned through nearly a billion dollars of liquidity in 2012.

What Should Customers Expect at the New-New JC Penney’s?

Option 1: Undo everything Johnson did and go back to the JC Penney of old.

Ullman could theorhetically mark down all the merchandise associated with the “new” JC Penney via deep discounts and recreate the shopping experience customers had come to expect. Sozzi thinks Ullman would be making a disastrous mistake. “If he does that in the next couple months JC Penney will no longer be in business,” he states without a trace of doubt.

JC Penney took deep discounts to reduce inventory and generate cash flow at the end of 2012. Most of the goods that would need to be marked down to go back to the old merchandising strategy haven’t even arrived at the remodeled stores. Retailers order goods months ahead of time, meaning most of what JCP had intended to sell as part of back to school has already been purchased.

If the company starts marking down that merchandise now its financing will dry up immediately. Whatever else they do JCP can’t go home again.

Option 2: Stick with Ron Johnson’s plan.

Suffice it to say the board of directors is unlikely to implement Johnson’s vision considering the decisiveness with which they just fired the man.

Option 3: Split into two chains.

Strangely enough, the fact that Johnson barely got halfway through his planned remodels before getting fired may be the best thing Ullman has going for him. Abandoning the need to dedicate resources to bringing the legacy stores up to speed could buy some time with the vendors and allow the company to operate both the hip JCP locations and the tired JC Penney’s as separate entitles.

Sozzi doesn’t think such a move eliminates Ullman’s need to spend on the “500 zombie stores that Johnson didn’t show any love to” but reduces the sense of urgency on that spending.

Breaking JCP into two different divisions is also a way to acknowledge the current reality as Sozzi sees it. “That’s the ultimate message coming off of Ron Johnson that he split this company in half and nobody even realizes yet,” he says.