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J.C. Penney's CEO Jumps to Lowe's: Is the Turnaround Doomed?

Adam Levine-Weinberg, The Motley Fool

On Tuesday, struggling department store chain J.C. Penney (NYSE: JCP) made a shocking announcement. CEO Marvin Ellison is resigning from the company as of June 1 in order to take the top job at home improvement giant Lowe's (NYSE: LOW).

Ellison's unexpected resignation leaves a gaping hole at the top of J.C. Penney's relatively thin leadership bench. That's not good news for a company that is still struggling to recover from a failed strategy shift under former CEO Ron Johnson. On the other hand, Ellison's move to Lowe's doesn't mean that he lost confidence in J.C. Penney's turnaround plan.

A sign of failure?

In the past few days, several pundits have argued that Marvin Ellison wouldn't have left J.C. Penney if he thought the company was still on the road to recovery. As a result, they see his decision to jump ship as a clear warning that J.C. Penney can't be saved.

However, this is an overly simplistic view. While J.C. Penney is an iconic company that has been around for more than a century, its annual revenue has receded to a little more than $12 billion and its market cap has plunged to less than $1 billion.

The exterior of a J.C. Penney store.

J.C. Penney has become a shadow of its former self. Image source: J.C. Penney.

By contrast, annual revenue is about to surpass $70 billion at Lowe's. Furthermore, Lowe's market cap has surged to roughly $80 billion. If he is successful at Lowe's, Ellison stands to make a lot more money than J.C. Penney could have ever paid him. Furthermore, Ellison had more than a decade of experience in the home improvement industry before moving to J.C. Penney, so Lowe's is a natural fit for him.

Thus, there were plenty of good reasons for Marvin Ellison to make the move to Lowe's. Indeed, he described it to J.C. Penney employees as a "once-in-a-lifetime opportunity" that he didn't seek out. Investors shouldn't read too much into his decision to leave.

J.C. Penney is losing a good leader

Ellison's reputation has lost some of its luster over the past couple of years, as the turnaround initiatives he put in place at J.C. Penney weren't enough to drive steady sales and earnings growth. Comp sales were flat in each of the past two fiscal years, following a 4.5% increase in fiscal 2015. J.C. Penney's recently reported first quarter 2018 results were disappointing, too. Furthermore, profitability is starting to erode again.

Nevertheless, Ellison is a smart, seasoned retail executive who will be tough to replace. (Lowe's certainly didn't hire him out of desperation.) His mixed record at J.C. Penney mainly speaks to the headwinds the company has faced in recent years. Most other department store chains have posted inferior sales results and more margin erosion than J.C. Penney over the past three years.

J.C. Penney has been slimming down its executive ranks lately, including eliminating the EVP of Omnichannel role earlier this year. There's no clear internal candidate to replace Ellison. Furthermore, J.C. Penney's precarious financial position makes it a less attractive destination for potential external candidates than it was five years ago (let alone a decade ago). This makes Ellison's departure particularly painful.

The silver lining

While it's disappointing that J.C. Penney is losing its CEO, the good news is that Ellison has already implemented a promising strategy that could drive a recovery in sales and earnings over the next few years. By adding new merchandise categories (such as appliances and toys) and expanding others (including furniture and mattresses), J.C. Penney is now in position to profit from the demise of Toys 'R' Us and the rapid collapse of Sears Holdings.

J.C. Penney has offered retention bonuses to five of its top remaining executives, four of whom will constitute a temporary "Office of the CEO." This should enable the company to stay on track over the next few quarters despite not having a permanent CEO.

Thus, Ellison's departure doesn't mean J.C. Penney investors should give up hope. That said, it adds even more risk to what was already a risky turnaround bet.

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Adam Levine-Weinberg owns shares of J.C. Penney. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.