Macy's shows JC Penney how to rebuild

Troubled department store chain's new chief doesn't have luxury of time to reverse fortunes

PUBLISHED : Saturday, 13 April, 2013, 12:00am
UPDATED : Saturday, 13 April, 2013, 4:51am

At the heart of Ron Johnson's plan to turn JC Penney into a mini mall of boutiques was the notion that the department-store model needed reinvention.

Yet while JC Penney faced challenges on Johnson's arrival - not least that its middle-income customers had been hit hard by the economic downturn - other department stores had been thriving without a radical course correction.

For instance Macy's has turned in 12 consecutive quarters of sales growth and managed to stay relevant when many bricks-and-mortar retailers have lost ground to the internet.

Myron Ullman, who replaced Johnson as chief executive officer on Monday, turned JC Penney around in his first stint running the chain, only to stumble once the United States slipped into recession in 2008. Now Ullman or his successor will have to decide what parts of Johnson's strategy can be salvaged. Ditching it altogether would be costly and, besides, some of the brands Johnson introduced were starting to generate buzz and sales.

The chain's operations consumed US$10 million in cash in the year ended February 2, the first year they've done so since at least 1987, according to data compiled by Bloomberg. JC Penney produced US$820 million in cash from operations the previous year.

Ullman declined to be interviewed for this story. The new CEO, also named to the board, was first asked about replacing Johnson by Chairman Thomas Engibous this past weekend. That and the fact he doesn't have a formal contract with the company has raised doubts about how long he'll be there.

Ullman makes sense in the interim because he knows the company's operations and that will help given the urgent cash situation, Michael Binetti, an analyst for UBS in New York, wrote in a note to clients. "JC Penney does not have the luxury of time to bring in a fresh CEO that could take some time to learn the operations and develop a strategy."

The chain had a net loss of US$985 million last year as sales sank by a quarter to US$13 billion, the lowest since at least 1987.

At root, Johnson's vision for JC Penney differed little from what other department stores have been doing for some time: carrying exclusive merchandise that consumers can't find anywhere else. Consider the legal battle between Macy's and JC Penney over the right to sell Martha Stewart-branded merchandise. Both companies want to use Stewart's name to lure customers into their stores. Johnson won kudos from analysts for choosing a range of cutting-edge brands, including the youth-oriented Joe Fresh apparel brand.

Even as JC Penney's sales slid, there was evidence that Johnson's focus on exclusive merchandise was having an impact. The company said sales per square foot increased at locations with boutiques dedicated to Levi's, Izod, Liz Claiborne, and Arizona Jean Co.

Ullman pursued a similar strategy during his previous stint as CEO, most notably with the cosmetics brand, Sephora. JC Penney opened more Sephora stores last year.

Johnson's emphasis on hip brands was an attempt to capture younger shoppers and "it was the right path for JC Penney to take", said Robin Lewis, a retail consultant in New York.