Ellison's Departure Is an Opportunity for J.C. Penney

Some unexpected news shook up J.C. Penney (NYSE: JCP) investors Tuesday morning.

CEO Marvin Ellison, who was brought in from Home Depot back in 2015, resigned abruptly, saying he would take the top post at Lowe's. In his place, the department store chain has formed an office of the CEO made up of four executives, which will carry out Ellison's duties once he departs on June 1. Meanwhile, the board has formed a search committee to find a new CEO.

The sudden exit of a CEO is rarely a good sign for a company, especially when they leave for another company in the retail industry The stock unsurprisingly fell on the news, trading down as much as 9% Tuesday morning. Investors tend to interpret such events as a sign that a turnaround is near-impossible, believing in this case that Ellison got a taste of the challenges ahead and fled for greener pastures when Lowe's called. His resignation also creates a short-term problem for the company, as it will be without a CEO for probably months, and will have to adapt to a new leader and strategy once a replacement is tapped. When Ellison was chosen as a CEO, he was groomed for nearly year by interim chief Myron Ullman before Ullman stepped down.

However, Ellison's record as CEO was far from stellar. Since he took the leadership role on Aug. 1, 2015, the stock has fallen 71%, and shares have steadily dropped since the end of 2016 as the company's turnaround has stalled. The stock tumbled just last week on a disappointing first-quarter earnings report that included a widening loss and comparable-sales growth of just 0.2%, trailing rivals Macy's, Kohl's, and Nordstrom. Management offered a slew of weak excuses, like blaming the weather, and Ellison trotted out the familiar strategic talking points, pointing out that Sears was giving up market share to Penney and that his company was making progress on many of its initiatives. However, it's become clear that in spite of improvements Ellison has made -- like expanding the appliance selection, adding toys, adding new Sephora shops, and enhancing the company's e-commerce capabilities -- the company's prospects and performance are not improving.

While Ellison has shored up certain areas of the business, its biggest segment -- women's apparel -- has continued to lose sales. In 2017, women's apparel made up 22% of the company's sales, down from 25% in 2015, and that decline comes at a time when revenue has fallen. No other category has performed that poorly during that time, and management has reported comparable-sales declines in women's apparel in most quarters during Ellison's tenure.

A better way

Ellison came to J.C. Penney after spending 12 years at Home Depot, the last six of which he was in charge of the home-improvement retailer's store operations. That experience can be seen in Ellison's influence on the company. He focused above all on improving J.C. Penney's home department, adding appliances and shop-in-stores with vendors like Empire Today, as well as partnering with HVAC providers like Trane. Indeed, the home department has been the most successful under Ellison's tenure, as its share of total sales has grown from 12% in 2015 to 15% in 2017.

However, while the success in the home segment shouldn't be diminished, apparel, which makes up about half of the company's total sales when women's, men's, and kids are combined, is the core of the company's business and deserves the most attention. Getting women's apparel right is especially key because it is not only the company's biggest segment, but also the most likely to drive traffic to stores and build incremental sales in other departments, as 70% of the company's shoppers are women. Apparel is also higher-margin than many of its other categories, especially appliances, so building sales there is more likely to restore profitability.

Apparel initiatives under Ellison have largely fallen flat, and Ellison himself has acknowledged that the company's merchandising in the department has lacked as he said it's been over-assorted in traditional women's apparel and under-assorted in casual and contemporary.

Therefore, it would make the most sense for J.C. Penney's next CEO to have demonstrated success and expertise in apparel, specifically women's apparel, and Ellison's departure gives J.C. Penney an opportunity to correct this problem. The company has now made the mistake of appointing someone as CEO with essentially no apparel background twice in a row, after former chief executive Ron Johnson's disastrous tenure in 2012 after coming from the tech industry.

Apparel will remain the core of J.C. Penney's business, and there won't be a turnaround without fixing that segment. J.C. Penney's board of directors now has two strikes in selecting CEOs. The company won't survive a third.

10 stocks we like better than J.C. PenneyWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and J.C. Penney wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of May 8, 2018

Jeremy Bowman owns shares of J.C. Penney. The Motley Fool has the following options: short September 2018 $180 calls on Home Depot and long January 2020 $110 calls on Home Depot. The Motley Fool recommends Home Depot and Nordstrom. The Motley Fool has a disclosure policy.