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ron is an incredible talent but i don't think like the students in the room uh 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 to back your ceo and get in and give him and give him rope and i think 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 have you learned from the ones that haven't been successes you know again as i said in the beginning experience is making mistakes and learning from mistakes and uh 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 uh 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 and so the concern is whether this is coming you know but so far you know we've 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's 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 um and part of that has to do with governance which is a topic i'm sure we'll get to um 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 had become 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 of that price and a week later they'd market to twenty and they probably wouldn't sell many at that price and then they would send you a coupon where you got ten dollars off and then 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 all 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 and 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 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 eleven directors um and the ceo was 64 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 we helped the board with succession and there was a candidate uh 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 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 mervyn'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 uh brand excellence and cost management and the problem was recruiting him he's very happy living in you know atherton california he had three four hundred million dollars restricted stock an 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 uh 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 of 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 uh 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 they 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 mistake this whole notion of what he almost called fraudulent pricing this overpricing an item and then marking it down and marking down in coupons he said look there's a waste of time let's just mark it at the price the consumer knows the fair price because when you looked at those forty dollar dresses and forty dollar shirts they all sold it for something like twelve dollars and thirty cents but you got on average and very little sold at any other price let's just mark it at 12 bucks the consumer understands value we can save a huge amount of you know the company had spent enormous amount of man hours actually changing signs if you think about how often they're constantly repricing and re-ticketing and changing signs i made the stores look really cluttered and you know it 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 you know 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 we found ourselves in a turnaround 15 months after he was hired and we had to replace him and the lesson there are many um so number one this is what i call an extreme makeover of a company and when you do an extreme makeover it requires perfect board alignment uh 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 uh well it had it worked perfectly from the beginning there wouldn't have been a problem as things got dicier there was a divergence of opinion on the board 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 i 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 uh 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 to back your ceo and get 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 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 um 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 decision
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