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J.C. Penney (JCP) has found its new CEO, hiring Jill Soltau to lead the attempt to jumpstart its business, which has been dealing with stagnant comparable store sales and declining gross margins. Soltau appears to be a strong pick, with plenty of apparel and merchandising experience at companies with consumer bases similar to J.C. Penney’s.
However, it should be noted that even strong CEO picks may fail to turn around the fortunes of struggling department stores given the headwinds surrounding the sector (particularly middle-class department stores. For example, Kathryn Bufano brought strong relevant credentials when she became Bon-Ton’s CEO, but it still ended up going bankrupt within four years. J.C. Penney is in somewhat better shape than Bon-Ton was when Bufano became CEO, but the challenges of turning around these department stores should not be underestimated.
The New CEO
The timing of Soltau’s hire was not unexpected, given that it falls within the four to six month window after Ellison’s departure. As well, this also further explains Jeffrey Davis’ decision to find another CFO position prior to the new CEO shaping her management team.
As expected, J.C. Penney’s new CEO is taking a step forward in terms of career progression. Soltau is leaving the CEO position at JOANN Stores, a fabric and craft retailer that does roughly one-fifth of J.C. Penney’s revenues. Prior to that, Soltau progressed from chief merchandising officer to president at ShopKo, which is a department store retailer that does roughly one-quarter of J.C. Penney’s revenues. These companies had middle-aged women as a core customer, similar to J.C. Penney’s current customer base. That familiarity with a similar customer base should help Soltau’s transition to CEO of J.C. Penney.
The Bon-Ton Comparison
As a cautionary example, Bon-Ton’s hire of Kathryn Bufano from Belk (where she was president of merchandising) was widely viewed as a strong hire. However, the tough retail climate around middle-class department stores and Bon-Ton’s limited liquidity hampered her ability to turn it around.
Some aspects of Bon-Ton’s situation around when Bufano was hired is similar to J.C. Penney’s is now. In 2014, Bon-Ton reported +0.2% comparable store sales and adjusted EBITDA that was 5.4% of revenues. That is fairly close to what J.C. Penney will likely do in 2018.
J.C. Penney is in somewhat better shape financially now compared to how Bon-Ton was in 2014 though. Bon-Ton was constrained by having a large amount of secured debt (pretty much all its long-term debt was secured debt) and a limited asset base (with most of its stores leased rather than owned). This constrained its available liquidity and forced it to scrimp on investments in its business. With its 2017 capital expenditures guidance of $30 million (net of external contributions), Bon-Ton appeared to be spending less than 40% of what J.C. Penney is spending on capital expenditures (as a percentage of revenue).
Conclusion
J.C. Penney appears to have made a good CEO hire with Jill Soltau. After trying out Marvin Ellison’s retail experience in a different industry (with his Target (NYSE:TGT) experience being quite a long time ago and focused on loss prevention), it has hired someone with merchandising experience at stores with a similar consumer base as itself. As CEO of JOANN Stores, Soltau has been working on modernising the customer experience and incorporating more technology into the retail model (although JOANN Stores has started off with a smaller percentage of online sales).
A good CEO hire may not necessarily be enough to reverse J.C. Penney’s fortunes, as seen with Bon-Ton. However, Soltau starts out with a stronger financial position in terms of liquidity and ability to invest in the business.
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Disclosure: I am/we are long JCP.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Long JCP via KTP
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