Today’s announcement from JCP does not make us more or less inclined to own the stock here, but as much as we walked away more positive from the analyst meeting last week, this announcement probably gives more for the bears to chew on than the bulls. Here’s why…
- At last week’s analyst meeting, Ullman clearly brought greater intensity towards the subject of finding a replacement CEO. So the timing of the announcement is not a surprise. Though there was at least a fleeting chance that JCP hired a high-profile ‘rock star’ CEO like Glen Murphy (remember how close JCP was to hiring Mindy Grossman from QVC/Nike). Marvin Ellison might be good, but he’s not a rock star (at least in perception).
- Ellison has been serving as EVP of Stores at Home Depot where he oversaw a $78bn revenue stream over 2256 stores and 236mm square foot. At JCP, he’ll be overseeing $12bn in sales, 1112 stores, and 111mm square feet. Net/net coming to JCP is hardly an insurmountable task given his background. That’s a positive.
- We actually like the idea of not bringing a dinosaur department store executive to serve as CEO. But on the flip side, Home Improvement is about as far away from selling Clothes and Shoes as you can get. Inventory is far easier to manage at a store like Home Depot, particularly given that the merchandise does not go out of style every 90 days (to the point of obsolescence). Home Depot is the 900lb gorilla in the retailer/vendor relationship in virtually every category. While at JCP, it holds the cards with only a handful of vendor relationships, and those are with the brands that probably don’t matter. We’re not saying that Ellison can’t make this jump from one category to another, but rather that his success at HD does not guarantee his success at JCP.
- The fact that he is overlapping with Ullman in his new role for nine months is a positive. Transitional blowups are not likely. He’ll be there to learn how to execute on the plan that Ullman set out at the analyst meeting next week. We like that a lot. But if there is one thing that’s clear with the 21% sell-off since the analyst meeting, it’s that the market absolutely does not believe in the plan. So, a new CEO brought in to carry on what is viewed to be an unattainable plan can hardly be viewed as a positive.
In the end, after being extremely vocal about getting Ullman out of his seat early on, we’ve actually grown to respect the fact that he repaired a devastated balance sheet, and set the company on a trajectory of earning money by 2017 – something we think is absolutely achievable (in fact, we think break-even by 2016 is achievable). Still tough to find valuation support in that regard. But Ullman has probably done a better job than most others could. If Ullman/Ellison hits that plan, the stock is likely headed higher. We’ll need to hear more about the transition plan before we have any real conviction on the name. For now, we’re on the sidelines.