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SJ Special Report: J.C. Penney Post-Johnson, Still Struggling To Survive

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J.C. Penney’s continues to flounder following the ouster of Ron Johnson as CEO last April. Now, even after a major overhaul of its home department under new CEO Myron Ullman, predictions for the retail behemoth remain almost universally grim.

Michael Exstein, an analyst for Credit Suisse, expressed doubt that J.C.Penney’s retooling of their home department would bring any relief to their downward slide. He claims that “the home launch may have actually added to the challenges in front of management, rather than serving as a catalyst for improved traffic and merchandise perception.”

Ron Johnson pinned the future success of J.C.Penney on the reinvention of its home department, abandoning the previous focus on coupons and regular store sales in favor of showcasing hipper designers like Betsy Johnson and Levi’s. In place of rows of discounted apparel, Johnson installed a series of specialty shops intended to attract younger, wealthier shoppers.

At least initially, Johnson’s plans were received enthusiastically by the business community, pushing J.C. Penney’s stock up 24 percent to $43 in January 2012. However, J. C. Penney’s hopes soon soured, its stock plummeted more than 60 percent and credit agencies downgraded the company, once a benchmark of retail success, to junk status. After only eighteen months on the job, Johnson was given his walking papers.

And now optimism regarding the company’s turnaround remains in short supply. Warren Shoulberg, home furnishing editorial director for Sandow Media, foresees impending disaster, calling J.C. Penney’s new plans to revitalize their home department a “train wreck on the bottom line.” He recently opined: “The lifespan of this Penney home department will be short…very short. The home re-do will likely be a  financial disaster, with shockingly horrible sales and profitability, even in the context of the store’s performance over the next eighteen months.”

There are also signs of pessimism within the company’s executive hierarchy. A top J.C. Penney executive, speaking to the Huffington Post on the condition of anonymity, complained that Ullman is destined to fail since he insists on keeping the fundamental features of Johnson’s fatally flawed strategy intact. “Turns out the Johnson era of ‘brand names sell’ did not work,” he said. “Customers don’t care what brand of towels they buy, they want to see all the towels together by price.”

To make matter worse, the centerpiece of Ron Johnson’s widely discredited blueprint for J.C. Penney’s future, a costly deal with Martha Stewart, is now in question. Macy’s recently took J.C. Penney to court over the arrangement to sell Martha Stewart’s products exclusively, charging that it constitutes an infringement on its own previously existing contract with the home goods giant. As it stands now, J.C. Penney is allowed to sell the products under the generic label “Everyday” without explicitly advertising the brand as affiliated with Martha Stewart.

The anonymous J.C. Penney executive claims that many top managers are quietly hoping that the Martha Stewart deal tanks. “Let’s just hope we lose the lawsuit, then we can turn that space into something that will actually make us some money,” one manager purportedly said.

Amidst all the turmoil, the upper echelon of J.C. Penney’s executive ranks continues to hemorrhage talent. Paul Rutenis, senior vice president and general merchandise manager for the home division, has departed. Rutenis was hired by Johnson in April 2011 and tasked with “reenergizing the home merchandise department.”

Jeff Herbert, hired by ex-Coca Cola executive Sergio Zyman to lead J.C. Penney’s marketing team, has also departed. As recently as last May, a spokesperson for J.C. Penney told reporters that they were enthusiastic about Herbert’s work and were assigning him even greater responsibility as a result.

Chris Chapo, formerly divisional vice president of customer relationship marketing and loyalty, plucked from Apple by Johnson, has moved on. And while neither J.C. Penney’s chief information officer nor chief operating officer have been formally fired, it has not gone unnoticed that those positions have been delisted from the company’s website.

Many executives reported leaving because they anticipated J.C. Penney’s woes to continue and worsen. The retailer has been plagued by persistent inefficiencies, construction and licensing delays, and costly administrative missteps. According to one veteran supervisor who recently resigned after fourteen years of service: “I left because I knew the construction of the home shops was going to be a mess. Permits were not secured. The whole organization has lost credibility with me.”

The stakes are high for Ullman, especially with back-to school season fast approaching. The numbers for the last fiscal year were dim. Penney lost $985 million, or $4.49 per share, compared with a loss of $152 million, or 70 cents per share, in the year ended January 28, 2012. The company’s revenue fell 25 percent, to $12.98 billion, from the previous year’s $17.26 billion.

While the prognostications for J.C. Penney’s immediate future seem dispiritingly low, the stakes for Ullman are unusually high. The all important back-to-school season fast approaches and the company seems woefully unprepared to capitalize on it. And the Johnson-inspired plan to follow Target’s lead and become a source for “cheap chic” retail goods has been an abysmal failure. Furthermore, home goods has been an underperforming sector as a whole, consistently the worst retail category over the last seven years.

And no matter what happens, Ullman seems painfully aware that the buck stops with him. “I’m responsible no matter what happens,” he said. “That’s what you sign up for.”

 

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