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Two Turnarounds with New CEOs
04/03/2018 5:00 am EST
Investing when an outsider arrives as the new CEO of a struggling company can be quite rewarding. It’s one of our favorite catalysts – few changes bring as much potential improvement as the fresh perspective and energy that new leadership provides, explains George Putnam, editor of The Turnaround Letter.
However, bringing in an outsider isn’t necessarily a sure path to an immediate turnaround, for at least a couple of reasons. First, the new CEO often underestimates the problems that need to be fixed.
Sometimes the board of directors downplays (or does not fully understand) the issues when it recruits a new chief executive. Only when he or she actually gets on the job can the new CEO really begin to understand the nature and depth of the problems.
Second, even when the new CEO fully grasps the nature of the turnaround work to be done, he or she may be too optimistic about the time necessary to bring about the required changes.
Both internal constituencies, such as employees, and external constituencies, such as suppliers and customers, may be slow to adopt the CEO’s ideas. Very often when confronted with a new CEO advocating change, employees and suppliers will adopt the attitude of “this too shall pass.”
As a result, fully understanding the problems and then designing and implementing the necessary corrections can take many quarters or even years. Investors who are overly enthusiastic about the new CEO’s immediate impact can get in too early. Sometimes it pays to wait.
Below are two retail sector turnaround situations where a new CEO’s arrival hasn’t yet produced much in the way of stock performance, but which have promising prospects once the company moves beyond transitional issues.
Land’s End (LE)
This iconic brand is now on its third CEO since its 2014 spin-off from Sears. While the prior CEO was clearly a mismatch (a New York City-based high-fashion executive running a traditional Wisconsin retailer), the current leader, Jerome Griffith who arrived in early 2017, looks like a better fit.
He brings considerable experience from Tommy Hilfiger, Esprit and most recently luggage-maker Tumi, which he sold to Samsonite at a large premium. Recent results showed some encouraging improvements, lifting Land’s End shares from their all-time lows.
Alliance Bernstein (AB)
This respected company is both an investment manager and a provider of investment research to other managers. Like most managers, Alliance has struggled with outflows from its actively managed funds.
However, this appears to be turning around following the ouster of the former CEO and most of the board in May 2017. New CEO Seth Bernstein (unrelated to the company’s namesake) is implementing changes based on his deep experience as an investor and executive at J.P. Morgan (JPM).
The market appears to give little credit to the strong improvements in investment performance (which is producing higher performance fees and rising assets under management) nor to the growing revenues on the research side.
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