01 March 2013

Who Killed J.C.?

Who killed J.C.?

J.C. is in critical condition.[1][2]  You could argue that it is premature to investigate a person's murder before a body can be presented to establish that there was a death.[3]  Indeed, in the case of J.C., a prophet has foretold that J.C. will die and then that J.C. will be raised from the dead.[4] 

But, you would be wrong.  Dying declarations and contemporaneously recorded impressions of witnesses have been critical evidence in investigations to determine a cause of death for thousands of years in cases like this one.[3][4]

Initial efforts to assign responsibility for killing J.C. have been directed at a man who has a history with an apple that had a bite taken out of it that can provide access to the secrets of the tree of knowledge.[5][6]  And, I can't deny that he may deserve some of the blame.

But, honestly, I think that this case is more like Agatha Christi's Murder On The Orient Express, even if someone who is beyond the reach of justice is fingered as a scapegoat.  J.C. was probably killed through the combined actions of a group of people, not just by one man acting alone.[2][7]

The truth of the matter is that even I am partially responsible for killing J.C.[7]  I saw but ignored J.C. in the marketplace.[8]  I did not use my worldly wealth when asked to use them to glorify J.C. and gain access to the treasures that J.C. had to offer.[9]  I succumbed to the temptations offered by others.[10]  What can I say? 


Analysis

If you follow the links in the body of the text, it will become clear that I was talking not about "Who killed Jesus Christ?" (with an additional layer of the question that loomed over the second season of the 1980s prime time soap opera "Dallas", "who shot J.R.?", but instead about who killed the department store, J.C. Penney, Inc., which is a "corporate person."

J.C. Penney Company, Inc., is a retail company founded in 1902 and given its current name a century ago when it had 34 downtown stores in medium sized cities in the Rocky Mountains (and once had a thriving catalog business and transitioned after 1966 from mostly downtown locations to the newly burgeoning shopping malls of the suburbs).  It had $13 billion in sales last year at 1,107 stores in all fifty states (down from $17.2 billion the previous year).  The chain announced its plan to discontinue what remained of its once thriving catalog business in January of 2011, five months before its current CEO was hired, which was completed in October of 2011.  Michael Francis, the company president that Johnson hired to supervise day to day operations around the same time that Johnson official took the helm in October 2011, left the company abruptly in June 2012.  The company employs 159,000 people and is currently based in Plano, Texas.

The company made the unexpected announcement yesterday that its annual sales revenues have fallen by 25% in a single year between 2011 and 2012, to the lowest level since 1987 in nominal dollars (and hence to even more distant lows when adjusting for inflation) despite a recovering retail sector.  It also announced that its net loss that had widened from 0.5% of sales last year to 4% of sales in the past year.  The department store chain's sales are now less than those of botique mall retailer company Gap, Inc. and are less than half of those of one of its direct mall department store competitors, midpriced department store chain Macy's, Inc.  Analysts had known that J.C. Penney was doing poorly and would need to shuttter many stores, but had not anticipated that the news that flows mostly from poor sales in the critical fourth quarter Christmas shopping season, would be anywhere close to this bad.

The poor performance of J.C. Penney, Inc., which had already been lackluster and stagnant before it hired its current CEO (although it did not have sales that were cratering dramatically at that point) parallels that of Sears, Inc., a department store of a similar era with a similar approach which is also performing dismally in its core retail sales business (that many argue has become secondary to its real estate portfolio liquidation activities in the eyes of its chairman who is its leading investor). 

The company's share price had declined 30% since June 13, 2011, the day before it was announced that Ron Johnson, who had been the head of retail marketing at Apple Computer, Inc. (whose iPhone is the dominant profit generator in the cell phone market despite having only a modest market share and which has cash reserves of well in excess of $100 billion that it can't find anything it wants to invest in) would be the company's next CEO, at a time when the shares of big retailers who are part of the S&P 500 index overall have increased by 42%.  Before a successful tenure at Apple, Johnson was an executive at the Target retail store chain for sixteen years. 

The company's current market capitalization as of today is $4,639 million, but that could collapse in a moment on more bad news and will very likely fall at least somewhat over the next few weeks and months.  The company has lost more than $2 billion in market capitalization since Johnson was hired as its CEO, including close to $1 billion of lost market capitalization this week alone.  The company has about $9.8 billion of assets on its books (including about $121 million in cash at the start of 2013) and about $6.6 billion of debt liabilities, of which about $2.9 billion is owed to long term bondholders and secured creditors.  The balance of its liabilities consist mostly of trade credit and deferred tax liabilities.  Its equity on a book value basis is about $3.2 billion, which the market capitalization of the company currently values at a premium of $1.4 billion over book value.  About 3.5% of the market capitalization of the company is owned by insiders.

Standard and Poors dropped its credit rating from B- to CCC+ (its lowest junk bond rating) on the news yesterday which trimed 17% from its share price in a single day.  Its intratrade low of 22% below its price the previous day is the biggest intratrade decline since 1980 according to Bloomberg.  The credit rating report anticipates what Bloomberg News paraphrased as "further operational disruptions in the next few quarters" and also what Standard and Poors described as "less than adequate liquidity."  A mid-sized brokerage firm cited in the Bloomberg News story has given J.C. Penney a "sell" rating with its clients. 

If sales continue to plunge and a poor credit rating increases the interest costs of a fairly heavily leveraged company that is already losing money, a bankruptcy in the next year or two is likely. 

In a worst case scenario, J.C. Penney would not be able to renegotiate its lease obligations in bankruptcy in time to avoid liquidating its operations entirely.  But, the more likely scenario is that it would be able to put together a plan in which its shareholders are wiped out, its bondholders receive either stock in a reorganized company or a meaningful percentage of the nominal value of their debts  in an auction of the operating business to new equity holders, hundreds of unprofitable stores closed rapidly, many tens of thousands of people lose their jobs, unprofitable lines of business and business relationships are discontinued, and a new CEO charts a stable course for the company towards an improved business model - something that Johnson has a vision to do but has not managed to implement quickly enough to make a difference.

Johnson acknowledged in a conference call with investors and analysts yesterday (public companies are required to conduct them on a regular basis as part of its duties to public shareholders as a company regulated by the Securities and Exchange Commission) that he had "made some big mistakes."  This is an understatement.  Few CEOs of publicly held companies in the United States have so dramatically run into the ground such a well established icon of American big business in just twenty months.  Johnson's straight compensation is less than $400,000 a year, about a third of what he made at Apple.  But, he was awarded $53,000,000 of restricted stock in J.C. Penney when he was hired as CEO.  It isn't clear (to me) how much of that stock award is fully vested.  He has reduced the value of the company by an amount equal to about forty times his stock award since he was hired.

Apparently, micromanaging a fairly recently developed niche marketing effort for an extremely high quality, but only moderately highly priced product is an entirely different matter than being the CEO of a sprawling company with many decades of a entrenched corporate culture and a lackluster product line of goods that its buys from other people and resells rather than manufacturing itself.

My point, only half in jest, however, is that Johnson, who was hired with a goal of turning around a struggling company that was sliding towards collapse in any case when he was hired.  But, in sixteen months of being actually on the job, he has been at the helm sufficiently long before the sudden sales collapse announced yesterday that he can't in fairness blame this on his predecessor or anything that was clearly underway on that trajectory when he was hired.  In all likelihood, the board won't give him the opportunity to correct the situation himself, because he was an outsider hire who hasn't had enough time on the job to entrench himself fully in a position of unquestioned control over the board of directors who just hired him less than two years ago.

Ultimately, the problem at J.C. Penney is that it has a business model that no longer works and no decisive plan to turn itself around.  The store simply isn't the first choice most of the time for middle class families like me who should be its core market, because its goods are dull and its prices aren't particularly exceptional.  Johnson has failed to adequately address that fundamental problem.

Footnotes

The religious allusions in the first part of the post, are identified in footnotes below for readers who might not otherwise understand them because they are not familiar with these liturgical Western Christian references, and for readers who are generally familiar with the references but don't know precisely where they come from historically.

1. See Saint Paul's First Epistle to the Ephisians 1:1-3. Generation X and younger Christian evangelists and evangelical Christians in the United States often refer to "Jesus Christ" as "J.C." to establish a feeling of informality, personal familiarity and relevance for younger audiences who are or may have been in the pst turned off by the formality of liturgical Christianity.  See, e.g., the comment by "Progressive Mike" to this blog post.
2. Mark 15; Matthew 27; Luke 23.
3. Mark 16:6; Matthew 28:6; Luke 24:6.
4. Hosea 6:1-2; Mark 14; Matthew 26; Luke 24; John 2:18-22.
5Genesis 2:7-Genesis 3:24. See also Adams, Cecil, The Straight Dope: Was the forbidden fruit in the Garden of Eden an apple?, The Straight Dope (24 November 2006, retrieved 6 October 2008).
6. See regarding the doctrine of original sin and its connection to a death: Saint Paul's Epistle to the Romans 5:12-21; Saint Paul's First Epistle to the Corinithians 15; John 3; Psalm 51:5 traditionally attributed to King David; and Saint Augustine of Hippo's (flourished 386 CE to 430 CE) Epistle to Julian of Eclanum entitled Contra Julianum (opus imperfectum) (shortly after 421 CE) and Imperfectum Opus contra Iulianum.  The statement assuming this doctrine in the Nicene Creed wascomposed at the Council of Constantinople in 381 CE also known as the Second General Council, is part of official church doctrine in the Roman Catholic Church, the liturgical Protestant churches, and the Eastern Orthodox churches, restated consensus understandings to resolve issues of heresy accusations and determine who was a true Christian of the recently established church of the Roman Empire at the First Council of Nicaea in 325 CE.
7. The doctrinal notion of bearing responsbility as a consequence of being an after the fact beneficiary of a death who has willingly accepted the benefits associated with it are implicity in the Nicene Creed and previously cited references to Saint Paul.[5]  Evangelical Christians who reject many of the formal texts and doctrines adopted by the pre-schism, pre-Reformation Roman Catholic church after the New Testament era, still share many of the basic concepts set forth in this creed which has a typical articulation of similar concepts in a less erudite style that does not acknowledge the non-Biblical intellectual development of this doctrine by early Christian leaders.  These doctrines were not shared in quite the same sense by some branches of Christianity that did not share the common heritage of the council of Nicaea (such as the historic Christian churches of India and Ethiopia).
8. John 2: 12-25.
9Matthew 5:3-12; Luke 6:20-22; Didache 1. Cf. Matthew 13: 44-54.
10. Various, but including the Temptations of Christ.  Surrender to temptation is a recurring theme in both the Hebrew Bible and the New Testament.

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