Executives From the “Greatness Tree” Do Not Necessarily Produce Greatness

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

When a struggling company gets new leadership it creates excitement. Investors are often willing to give new CEOs and executives the benefit of the doubt as new leaders transition and implement their vision. However, as we recently saw with Ron Johnson and J.C. Penney (NYSE: JCP), change in leadership doesn’t always produce a fundamental change in a business. As we look throughout the market, I can’t help but to wonder if we are seeing this process repeat, as investors connect greatness to the success of executive in previous positions.

The “Idea” of Change

On Tuesday April 23, RadioShack (NYSE: RSH) announced Q1 earnings, and they were horrible to say the least. If you look through the quarter, you won’t find one positive, as the company badly missed on both the top and bottom line with same store sales dropping 5.70% year-over-year. However, the stock traded volatile, as if it didn’t know how to respond, as the company’s new CEO Joseph Magnacca reassured investors of the “significant opportunity” presented for the company.

Magnacca didn’t even think about providing guidance for the upcoming quarter, meaning that investors are owning RadioShack on the “idea” of change. To me, this sounds familiar, almost sounds like the excitement that surrounded Ron Johnson when he took the job at J.C. Penney. Ron Johnson was considered a retail guru, and quickly implemented his ‘mini-store” idea. However, dropping same-store sales, heavy discounting, and a less than stellar financial position weighed heavily on the company.

Johnson & Magnacca: Side-by-Side

So how does Magnacca compare to Johnson? Hopefully, he does not, and he will be successful in his turnaround at RadioShack. However, Magnacca has an even greater task than Johnson, and I argue, that if he’s successful, it would be the greatest retail turnaround in history. Because here’s the thing, RadioShack has $4.26 billion in annual sales, a sloppy balance sheet with poor cash flow, too dependent on mobile, price cuts that cannot exceed the rate of same-store sales declines, and a low margin technology focus. Yet much like Johnson, Magnacca has a stellar resume and a history of strong performance.

Johnson was long-considered a retail genius at Apple, Magnacca was the the Executive VP of Walgreen Co. during a period of great gains. Both Apple and Walgreen Co. are massive companies and are leaders in each respected space. The difference between the two men is that Johnson did have previous retail experience and success, while Magnacca is making a major shift from over a decade of leadership in the pharmaceutical space to the evolving technology industry. With that said, we can’t deny that Magnacca was great during his term at Walgreens, and brought many new ideas to plate. However, pharmacies and technology are two completely different industries, and investors have been quick to ignore this fact in favor of the belief that Magnacca is RadioShack’s savior.

Here’s the thing, Magnacca is unproven, and when you consider the change in industry, he is even more unproven than Johnson at J.C. Penney. While the two are most likely different in leadership approach, there are very few if any reasons to give Magnacca the benefit of the doubt. Since he began, the stock is flat, while fundamentals continue to decline. My advice is to assess the stock according to fundamentals, make a decision as to whether or not a comeback is possible, and then make your investment decision. Don’t buy solely on leadership and ideas, or you will most likely experience a similar fate as those who tried with J.C. Penney.

Conclusion

“One of the greatest mental pitfalls that investors encounter is that for excitement. It produces an overly optimistic outlook, which eventually leads to risky and emotional decisions. If our goal is to remain emotionless and smart, then what causes this excitement should be ignored.” Taking Charge With Value Investing, (McGraw-Hill, 2013)

When a big name successful executive comes from a large cap industry giant to a troubled company it creates a spark, and rightfully so. It’s kind of like the Bill Belichick coaching tree and the New England Patriots, as mediocre and good often look great when led by true greatness. The difficult part is separating the Romeo Crennel and Charlie Weis’ from the very few Nick Saban’s (all football references). While all who come from the “greatness tree” do not all produce fundamental gains, all produce excitement, and many times that excitement is a trap that will cost you money. Bottom line: Approach with skepticism.


Brian Nichols has no position in any stocks mentioned. The Motley Fool owns shares of RadioShack. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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