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Iran is an incredible talent but I don't think like the students in the room he'd ever made a mistake before and I think it was as the data kept coming back you know Ron still had a lot of confidence it was going to work and you've got a back here CEO and give in and give him and give him rope and I think uh Ron will be and I think he'd say this today he'll be a much better CEO the next time because having had a big negative experience like this what have you learned from the successes and then maybe what if you learned from the ones that haven't been successes you know again as I said at the beginning experience is making mistakes and learning from mistakes and unfortunately as students you haven't made many mistakes yet if you've gotten to Oxford at this point in your career the biggest risk is you probably haven't screwed up a lot and so you know the risk of that is when data comes across your desk that's inconsistent with your being successful you're less likely to pay attention to it than if you've made a few mistakes so I encourage you to make some mistakes um and actually I've made plenty over the course of my career and I think I've been very successful over time but it's not been a straight line up in fact I had if I were a stock it would look something like this after business school you know and then so the concern is whether this is coming you know but so far you know we you know the overall trend has generally been positive but you know there are certainly bumps along the way and uh JCPenney is a company uh that we invested in that we knew on the way in was a much higher risk situation than a Canadian Pacific so JCPenney for those of you not familiar is 112 year old American sort of iconic retailer that certainly way past its prime it probably peaked 25 or 30 years ago again another example he had James cash Penny who founded the company he died I think in the early 70s and there's a pretty good correlation between when the founder goes and when the company goes and part of that has to do with governance which is a topic I'm sure we'll get to but the time we invested JCPenney stock was down from 80 to about 20 a share it was trading at about four times operating income it had lots of assets lying around in the company that were non-core assets it had a very bloated expense base and it was generating very little sales per square foot it was a very underachieving retailer and part of that is the brand it becomes somewhat tired and they had gone to a very highly discount oriented model where they'd Mark a address at forty dollars and they wouldn't sell any at that price and a week later they'd mark it to 20 and they probably wouldn't sell many at that price and then they would send you a coupon you got ten dollars off and then you start to sell a few and then if you use your credit card you got four dollars off and if you bought this moment you get another five dollars off and eventually it was you know eight bucks or whatever and they sell a lot of them at that price and um but this was undifferentiated merchandise and the thesis was um this company has actually still a brand well faded uh restorable and uh because they were created over the last 112 years they actually own about 112 million square feet of some of the best real estate in the shopping mall and the shopping malls uh in the shopping uh real estate industry they own or have very long-term leaseholds at very low rents we said look this is a great platform to rebuild the company and we bought a 16 stake in the company uh we I was invited to join the board I joined the board with uh a friend who bought 10 along with us so we owned together 26 of the company we both joined the board we were two of 11 directors and the CEO is 64.
uh and uh the board was very much focused on succession as any board should be generally but particularly when their CEOs in his mid-60s and uh we help the board with succession and there was a candidate that kept surfacing as the best guy in retail and this guy's name is Ron Johnson and he had an ideal background he didn't go to the Oxford business school but he said he went to Harvard Business School uh and he graduated he went to work for mervin's his dream in life was to reinvent the department store and mervin's was kind of a Dying department store it was acquired by Target so he spent a few years at mervin's he spent 10 or 11 years at Target which is probably the best run U.S discount department store and then he was hired by Steve Jobs to build the Apple Store from a blank sheet of paper and he did an absolutely incredible job and we said look you couldn't ask for a better background to do what we're trying to do here reinvent the department store combine the Apple customer store experience with uh you know kind of some of the Target brand excellence and cost management and the problem is recruiting him he's very happy living in you know Atherton California he had three 400 million dollars restricted to stock on Apple 100 million of which he was going to lose if he left and he had kids who were in you know 13 15 years old in the middle of their you know at a time when parents don't like to move but I managed to convince him to take the job and he walked away from 100 million restricted stock uh we gave him 50 million to make up for it but he still took a loss when he took the job then he invested 50 million dollars in seven year options that he bought with his own money that he couldn't sell for six years I thought this is the absolute perfect thing we have the best guy we've got a great platform at a really cheap price we have the perfect alignment of incentives and I thought it's done but it didn't work but it didn't work and uh and so Ron got started in November of uh 2011 and he proceeded to make a series of changes many of them very favorable among them took a very hard look at the cost structure and found about a billion dollars that he could take out of the cost structure of the business we took a hard look at all the non-core assets and we monetized about 600 million dollars with the non-core assets so far so good and then he launched a business plan to convert the JCPenney store into basically a mini shopping mall a selfridges type model where there were a series of Brands Each of which would have their own kind of presence in the store and then you'd have a Consolidated checkout you know with a wireless experience and sort of this apple-like customer service experience and he sold this idea to brands that heretofore wouldn't be willing to go into JCPenney and the guy's very charismatic was a great idea he had a whole bunch of brands that he got from around the world who were excited about opening up inside JCPenney and he went to work but he made one very significant strategic each day this whole notion of what he almost called fraudulent pricing this overpricing an item and then marking it down and marking it down in coupons he said look this is a waste of time let's just Market at the price the consumer knows the fair price because when you looked at those 40 dresses and 40 shirts they all sold it for something like 12 and 30 cents but on average and very little sold at any other Price He said let's just Market at 12 bucks the consumer understands value we can save a huge amount of you know the company had spent an enormous amount of man hours actually changing signs if you think about how often they're constantly repricing and reticketing and changing signs I made the stores look really cluttered and you know they sounded like a brilliant idea and Apple the Apple experience was not about testing so instead of trying this out in one or two stores or in a region he rolled it out across the country and it failed and the customer who had become accustomed to getting coupons in their Sunday circular all of a sudden coupons weren't there and so they decided not to come and we lost about a third of our customers after about 12 months and the great thing about a retail business if you get it right is this business has enormous operating leverage right because you've got a substantial fixed cost base but once you start generating additional sales it almost all drops a lot of it drops to the bottom line well only a problem with leverage as you learn in Business Schools it works in reverse and so all of a sudden the company was losing huge amounts of money after having spent a ton of money on Capital rebuilding and redesigning these stores and we found ourselves in a turnaround 15 months after he was hired and we had to replace them and the lesson there are many um so number one this was what I call an Extreme Makeover of a company and when you do an Extreme Makeover it requires perfect board alignment and backing for the CEO and uh we didn't have that number one we were one of 11 directors on the board and there was still a while it had it worked perfectly from the beginning it would have been a problem as things got dicier there was a Divergence of opinion on the board of what to do and when to do it and who to hire so I think that's one interesting lesson I don't think I'll ever go on a board and be one of 11 anymore like going on with a mandate like in Canadian Pacific two you know I think Ron is an incredible talent but I don't think like the students in the room he'd ever made a mistake before and I think it was as the data kept coming back you know Ron still had a lot of confidence it was going to work and you've got a back here CEO and give in and give him and give him rope and I think uh Ron will be and I think he'd say this today he'll be a much better CEO the next time because having had a big negative experience like this I think third retail is one of the businesses where you can really test right you can take a region you can take a store and you can try things out and rejigger them and test them and I think you know the Apple experience Steve Jobs was all about the customer doesn't know what he or she wants I know what the customer wants and and Steve Jobs you know got it right I think in retail you know there's a kind of a saying the customer knows what he or she wants and I think you really have to listen to that so while I actually I still love the vision for JCPenney I think it was right I think the execution was difficult um and uh you know to do something like that and also in the public domain right this is a major change and the company was constantly being harassed by the press and Ron was attacked I think it makes it difficult to make decisions
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