In June 2011, JCPenney announced what looked like one of the greatest executive hires in retail history. The struggling department-store chain had recruited Ron Johnson, Apple’s Senior Vice President of Retail and the executive widely credited with helping Steve Jobs create the Apple Store, to become its new CEO.
Johnson had joined Apple in 2000 and spent the next 11 years helping turn a risky experiment in brick-and-mortar retail into a phenomenon. By the end of Apple’s 2011 fiscal year, the company had 357 stores around the world, and the average location was generating $43.3 million in annual revenue.
For JCPenney, landing Johnson looked like a coup. Investors agreed: the company’s stock jumped more than 17% when his hiring was announced. Johnson called running a major retailer something he had “always dreamed” about and described JCPenney as the greatest opportunity in American retail.
There was just one very expensive catch. To take the job, Johnson had to walk away from approximately $80 million worth of near-term Apple equity.
That was painful enough in 2011. What happened to those Apple shares over the next 15 years makes the decision absolutely unbearable.
(Photo by Visual China Group via Getty Images)
The $80 Million He Left At Apple
Johnson wasn’t surrendering some vague promise of future compensation. He had 250,000 Apple restricted stock units scheduled to vest over the next three years.
The first grant consisted of 150,000 Apple RSUs awarded in 2008 and scheduled to vest in March 2012. The second consisted of another 100,000 RSUs awarded in 2010 and scheduled to vest in September 2014. Assuming he remained employed through those dates, each RSU would have converted into one Apple share.
When Johnson left Apple, he forfeited all 250,000. JCPenney later stated in its own filings that the outstanding near-term Apple equity he sacrificed was worth approximately $80 million.
The timing makes the decision even more painful. Johnson officially became JCPenney’s CEO on November 1, 2011. Had he stayed at Apple, the first 150,000 shares were scheduled to vest less than five months later. Keep that in mind for a minute. Had he stayed FIVE months, Ron would have earned the first tranche of 150,000 Apple shares.
JCPenney knew it was asking Johnson to leave a fortune behind, so it tried to compensate him.
JCPenney Gives Him $53 Million — And He Bets Another $50 Million
As part of Johnson’s recruitment package, JCPenney granted him 1,660,578 restricted stock units worth nearly $53 million. Even the company acknowledged that the award only partially replaced the roughly $80 million he was forfeiting at Apple.
But Johnson went much further than simply accepting JCPenney stock as compensation. He personally paid roughly $50 million for warrants giving him the right to acquire approximately 7.26 million JCPenney shares at an exercise price of $29.92 per share.
It was an extraordinary show of confidence. Johnson had surrendered $80 million of Apple equity and then put another $50 million of his own money behind his belief that he could transform JCPenney.
At the time, the confidence didn’t seem completely irrational. Johnson had just come from one of the greatest retail success stories ever created.
The Apple Store Miracle
When Apple began opening its own stores in 2001, plenty of people thought the idea was doomed. Technology companies generally sold their products through established retailers, and opening expensive stores in prime locations looked unnecessarily risky.
Jobs and Johnson believed Apple needed to control the entire customer experience. Johnson helped develop features including open product displays that encouraged customers to actually use the devices and the Genius Bar, which made technical support a centerpiece of the stores.
The strategy worked spectacularly. Apple’s retail division became a major business in its own right, and the stores became some of the most productive retail spaces in the world.
By the time Johnson left, Apple retail was no longer an experiment. It was a rapidly expanding empire, while the iPhone and iPad were pushing the broader company into another stratosphere.
JCPenney hoped Johnson could bring some of that magic to the department-store business.
The Great No-Coupon Experiment
Johnson arrived convinced that JCPenney’s dependence on constant sales and coupons was broken. In 2011, the chain had run an astonishing 590 promotional events.
His solution was “Fair and Square” pricing. Instead of marking merchandise up and then repeatedly discounting it, JCPenney would offer simpler everyday prices and dramatically reduce coupons and promotions.
There was logic behind the idea. If an item was really worth $20, why price it at $40 and then offer customers 50% off?
Unfortunately, JCPenney customers liked coupons. They liked sales. Most importantly, they liked feeling that they had gotten a bargain.
At the same time, Johnson launched an ambitious plan to transform stores into collections of branded boutiques, or “shops,” and pursued partnerships with names including Martha Stewart. Ellen DeGeneres became a prominent face of the company’s advertising.
The Experiment Implodes
Customers responded by staying home.
During fiscal 2012, JCPenney’s sales plunged from $17.26 billion to $12.99 billion, a decline of 24.8%. Comparable-store sales fell 25.2%, online sales dropped 33%, and the company posted a $985 million loss from continuing operations.
Johnson eventually acknowledged that aspects of the pricing strategy had confused customers, and JCPenney began bringing promotions back. By then, however, the board had seen enough.
On April 8, 2013, JCPenney removed Johnson and replaced him with Mike Ullman, the same CEO Johnson had succeeded.
Johnson’s tenure ran from November 1, 2011, through April 8, 2013: 524 days, or a little over 17 months. During that period, JCPenney’s share price lost roughly half its value, and Johnson received no severance payment.
What About That $50 Million Side Bet?
Ron’s personal $50 million wager turned out even worse. As a reminder, he had paid $50 million for warrants giving him the right to buy 7.26 million shares at $29.92 apiece. Factoring in the $6.89 per share he paid for the warrants themselves, JCPenney stock needed to rise to roughly $36.81 just for Johnson to break even on the bet.
On the day Johnson was fired, JCPenney shares were trading at around $15. By the end of the warrants’ 7½-year life in December 2018, JCPenney stock was hovering around $1, leaving the warrants hopelessly out of the money. Had Johnson held them through expiration, his $50 million investment would have been wiped out.
What About Those Lost Apple Shares?
As a reminder, before he left, Ron was entitled to receive 250,000 worth of Apple shares over the ensuing three years. BUT! He would have received 60% of them – 150,000 shares – in just five MONTHS.
In June 2014, Apple completed a 7-for-1 stock split. Johnson’s hypothetical 250,000 shares would therefore have become 1.75 million shares. In August 2020, Apple completed another split, this time 4-for-1. So, Ron’s 1.75 million shares would have become 7 million Apple shares. Apple closed today at $326.57 per share. At that price, 7 million shares would be worth:
$2,285,990,000
Your eyes are not deceiving you. That’s around $2.286 billion.
And that doesn’t even include more than a decade of Apple dividends. Over the years, those shares would have generated $74 million in dividends alone.
But that’s not the worst part. Had Ron simply remained an Apple employee for five more months and then left for the JCPenney job, he would have received 150,000 of those Apple shares. Today, this tranche alone would be worth…
$1,371,594,000
That’s $1.372 billion had he just waited FIVE MONTHS. Argh. I’m literally clenching my teeth right now in frustration, thinking about it.
Hindsight
It’s easy to judge Johnson’s decision with hindsight. When he accepted the JCPenney job, Apple was already enormously successful, but nobody knew it would eventually become one of the most valuable companies in history. Steve Jobs was gravely ill and would die in October 2011, while Tim Cook had only recently taken over as CEO.
When Ron left Apple, the company’s market cap was around $300 billion. As I type this article, Apple’s market cap is around $4.8 trillion.
Johnson’s career didn’t end with the JCPenney debacle. In 2014, he co-founded Enjoy Technology, a startup built around another attempt to reinvent retail. Instead of making customers visit a store, Enjoy sent trained employees directly to customers’ homes to deliver, install and demonstrate electronics. The concept attracted hundreds of millions of dollars from investors and partnerships with major telecommunications and technology companies.
In 2021, Enjoy went public through a SPAC merger in a deal that valued the company at roughly $1.2 billion. Unfortunately, Johnson’s second big attempt to reinvent retail ended much like his first. Less than nine months after going public, Enjoy filed for Chapter 11 bankruptcy protection in June 2022. Its assets were subsequently sold to Asurion for approximately $110 million.
Later this month, Johnson will release “Shop Different: How Retail Revealed Apple’s Genius,” a book about building Apple’s retail operation alongside Steve Jobs.
Johnson has said that he learned more from his failure at JCPenney than from decades of success, which is probably a healthy way to look at an experience like this.
And hindsight really is the point. Johnson wasn’t crazy to leave Apple in 2011. He had already helped create one of the greatest retail success stories in history, and JCPenney was offering him the opportunity to become CEO of a major American company and prove that he could do it again. Had the turnaround succeeded, Johnson might have been remembered as one of the greatest retail executives of his generation.
