J.C. Penney CEO out after just 18 months

Ron Johnson's attempts to revive struggling department store fall short



Ron Johnson

J.C. Penney Co. Chief Executive Ron Johnson is stepping down, leaving the future of a company that lost $1 billion in the past year in the hands of former CEO Mike Ullman.

After a year-and-a-half of foundering strategies to salvage the struggling department-store chain, Johnson leaves a company in disarray and with no clear way forward.

“It’s an unmitigated disaster,” said Hedgeye analyst Brian McGough in an interview. “The board should probably hand in their own resignation as well. It’s a wrong time to fire the guy. They are six months too early or six months too late.”

The company’s shares tumbled in after-hours trading on Monday after the company announced his departure.

J.C. Penney didn’t give any more details about Johnson’s departure, except to say he’s stepping down and leaving the company. Johnson was criticized for eliminating the company’s sales and coupons last year without a broad market test, a move that led to a sales slump.

The timing of his departure has brought more uncertainty to the company after Johnson has admitted some of his mistakes and introduced select sales and coupons back to the stores. Penney also is in the midst of rolling out Johnson’s in-store shops strategy, including a home section featuring brands such as Michael Graves and Jonathan Adler, after having recently rolled out Canadian apparel label Joe Fresh.

Johnson’s support grew even thinner after several Wall Street analysts cut their ratings on the stock this year. Bill Ackman, the man who pushed for his hiring at Penney in 2011, said last week at a conference hosted by Thomson Reuters that Johnson deserved criticism for unleashing a series of pricing and merchandising changes without first testing consumer views.

Ackman’s Pershing Square Capital Management is J.C. Penney’s largest shareholder.

Johnson’s leaving “tells us that the progress that should have started in mid March with Joe Fresh arriving” hasn’t lifted business as much as expected, Marie Driscoll, an independent retail analyst, told MarketWatch. The “heightened promotional activity in the past month must not have been making a difference.”

J.C. Penney didn’t respond to a question about whether Ullman’s return is on an interim basis or if the company plans to seek a permanent replacement. Ullman, who left J.C. Penney in November 2011 after Ackman pushed to bring Johnson in, served for seven years as J.C. Penney CEO and has 25 years of retail industry experience, Penney said.

“While J.C. Penney has faced a difficult period, its legacy as a leader in American retailing is an asset that can be built upon and leveraged,” Ullman said in the statement.

“To that end, my plan is to immediately engage with the company’s customers, team members, vendors and shareholders, to understand their needs, views and insights. With that knowledge, I will work with the leadership team and the board to develop and clearly articulate a game plan to establish a foundation for future success.”

Ullman, however, faces a tall order, analysts said.

“I don’t think the question is what Ullman will do,” McGough said. “It’s a question of what he can do. What he can do is to calm the tempers. Everybody is upset. They don’t know what their future holds. He’s a known entity at Plano, Texas. He can probably make people more comfortable.”

McGough said it is also crucial for Ullman to talk to the vendors that Johnson has helped to bring in and build relationships with.

“I would be really afraid right now if I were one of the vendors,” he said. There’s a risk, he said, that “one of these brands may be pulling out.”

McGough said Ullman can also seek to raise capital and sell more stock to raise funding while cut capital spending and focus on the brands that are slated to come in to the stores. “I don’t know what else there is he can do under the capital structure,” he said, adding the company could also consider selling some of the real estate it owns in a sale-leaseback transaction.

With J.C. Penney’s troubles, the company may also become the target of private-equity firms.

“You have a boat in high seas with no rudder,” McGough said.

For the short term, Driscoll said, Ullman will have to increase traffic and convert store visits to purchases through ways including increased promotions or advertising. He also has to figure out how to right the morale of the company, especially as Johnson has made a lot of hires who believes in his strategy.

“It doesn’t make sense to abandon the strategy” that Johnson implemented, Driscoll said. Ullman “is going to have to stabilize the business and take the best of what Johnson do. He’s got to get the awareness to get people in the stores.”