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JC Penney CEO stands by plans to transform stores

Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed. The Associated Press
Monday, November 19, 2012 - 12:01 am

NEW YORK – J.C. Penney CEO Ron Johnson seems unfazed that the department store chain's mounting losses and sales declines have led to growing criticism of his plan to change the way we shop. Perhaps that's because this isn't the first time during Johnson's 30-year career that he's attempted what seemed impossible.

People predicted he'd fail at selling high-end housewares and designer dresses at discounter Target, but shoppers still flock there years later for cheap chic goods. Likewise, almost no one believed that the Apple stores he designed to sell the consumer electronics giant's gadgets would make money. Yet Apple's retail operations have become the most profitable in the industry.

At the time, both decisions seemed radical. Now, they each are viewed as strokes of genius.

But Johnson's latest gamble is shaping up to be his biggest. He's not only aiming to reverse the fortunes of Penney, a 110-year-old chain that has had sales declines in four of the past five years as it's struggled to adapt to changing consumer tastes and shopping habits. He's also attempting to do something no other retailer has before: reinvent the department store from the ground up.

Since leaving Apple to become Penney's CEO in November, Johnson has been overhauling everything from the retailer's pricing to its merchandise to its stores. He got rid of most sales. He's brought in hip brands. And he's replacing rows of clothing racks with small shops that make the stores feel like outdoor mini malls.

But since Penney started the changes, the chain has reported three consecutive quarters of big losses on steep sales declines. Its stock has lost more than half its value. Its credit rating is in junk status. And critics are beginning to doubt that Johnson has what it takes to make the chain cool.

“He's trying to start a retail revolution without an army of consumers behind him,” says Burt Flickinger, III, president of a retail consultancy. “Penney will suffer dire financial and competitive circumstances as a result.”

But Johnson, 53, a Midwest native who speaks about his vision for J.C. Penney Co. with boyish enthusiasm, is undeterred: “Lots of people think we're crazy. But that's what it takes to get ahead.”

THE BEGINNINGS: `NO MORE JUMPING THROUGH HOOPS’

Virtually no one questioned Johnson's savvy when it was announced in June 2011 that he was leaving his role as Apple Inc.'s senior vice president of retail to take over the top job at Penney, a chain that had gained a reputation in recent years of having un-hip, boring stores and merchandise.

To the contrary there were lofty expectations for the man who had made Apple's stores hip places to shop and before that, pioneered Target Corp.'s successful “cheap chic” strategy.

Johnson, who says that his biggest inspirations in life are “sunrises” and “smiles,” spent several months before becoming Penney's CEO traipsing across the globe to find ideas on how to transform the company. On the itinerary: meetings with executives at trendy retailers and designers such as Gap, J. Crew, Diane Von Furstenberg and Ralph Lauren.

During these trips, Johnson hatched an idea to make Penney stores appealing not only to its core of middle-income shoppers, but also to new groups of younger and higher-income customers. Johnson decided to focus on three areas: price, merchandise and the stores.

Johnson started as Penney's CEO in November 2011. In his first couple of months in the role, Johnson hired big-name executives that he trusted.

Among them, Michael Francis, a top Target executive that he'd met while he worked there, was brought in as president to help redefine Penney's brand.

Johnson's boldest move came on Feb. 1 of this year when he rolled out new pricing in Penney's 1,100 stores. That's virtually unheard of in retail, where significant changes are typically tested in a few locations for several months before being rolled out nationally.

Johnson says that Penney didn't have several months to waste. Testing would've been “impossible,” he says, because Penney needed quick results.

Johnson's plan was designed to wean customers off the markdowns they'd become accustomed to, but that eat into profits. He ditched the nearly 600 sales Penney offered throughout the year for a three-tiered strategy that permanently lowered prices on all items in the store by 40 percent, and offered monthlong sales on select items and periodic clearance events throughout the year.

Penney, based in Plano, Texas, also stopped giving out coupons and banished the words “sale” and “clearance” in its new “fair and square” advertising campaign. The ads were colorful and whimsical: In one spot, a dog jumped through a hula hoop that a little girl held. The text read: “No more jumping through hoops. No coupon clipping. No door busting. Just great prices from the start.”

TEACHING SHOPPERS A `NEW LANGUAGE’

Johnson's plan received a warm reception at first. Investors began pushing Penney's stock up after he announced the plan in late January: It rose nearly 25 percent to peak at $43 in the days after the plan was rolled out in February. Analysts used words like “visionary” and “revolutionary” to describe the plan.

The honeymoon didn't last. After most of Penney's coupons and sales disappeared, so did its customers. And the ads didn't help: They were praised for being entertaining, but criticized for not explaining the new pricing.

Walter Loeb, a New York-based retail consultant, says Johnson acted in haste and sprang the changes on customers too soon. “The customer isn't accustomed to such drastic change,” he says.

The first sign that things were falling apart came in May when rival Macy's Inc. told analysts that sales were rising at its stores that share malls with Penney locations. A week later, Penney posted a $163 million quarterly loss. Revenue plunged 20 percent to $3.15 billion. The number of customers visiting stores fell 10 percent.

Wall Street didn't like the changes any more than Main Street did. A day after it posted the loss, Penney's stock fell nearly 20 percent — its biggest one-day decline in four decades — to $26.75. That same month, Standard & Poor's Ratings Services lowered its credit rating to junk status.

Johnson asked investors to be patient and reiterated his confidence in his plan. But a few weeks later, Johnson fired Francis, who'd been in charge of marketing the new pricing. Johnson, who wakes up at 4 a.m. without an alarm clock, took over that responsibility and brought back the word “sale” in ads. But things kept getting worse.

So six months after he rolled out Penney's plan, Johnson tweaked pricing. On Aug. 1 — just days before Penney posted another big loss on a second consecutive quarter of disappointing revenue — Johnson eliminated one tier of the pricing plan: the monthlong sales. He also brought back another taboo word: clearance.

Johnson says the original three-tier strategy was too confusing for customers. “We got too tricky,” Johnson told the Associated Press in an interview.

Johnson also vowed to better communicate Penney's pricing to shoppers. As part of that, Penney rolled out ads that were in stark contrast to the spots it used to introduce the plan. For instance, a TV spot touted free haircuts for students during the back-to-school shopping period.

“We thought, `Why are we trying to teach customers a new language to shop?” Johnson told The Associated Press. “We're just trying to be straightforward.”

But Johnson's decision to get rid of monthlong sales hurt more than it helped. On Nov. 9, the company posted its third consecutive big quarterly loss and revenue decline. Johnson says one big factor that dragged sales down was the elimination of the monthlong sales, which he says confused shoppers who like to compare prices.

Johnson says Penney lost $20 million a week in sales associated with getting rid of the monthlong events for a total sales loss of $260 million for the quarter. Penney posted a net loss of 56 cents per share, or $123 million, in the quarter ended Oct. 27. Revenue dropped nearly 27 percent to $2.93 billion.

On the news, Standard & Poor's dropped Penney's credit rating deeper into junk status. And its stock has fallen six straight days since the earnings report by a total of 25 percent for that period, to close at about $16 on Friday. The stock is down 62 percent since January – its lowest price since March 2009 when the U.S. was in a recession.

Johnson, who says the company will now show the suggested price of clothing and other manufacturers on price tags alongside Penney's price, doesn't seem to be panicking. In a meeting with analysts following the release of the company's results, he chalked Penney's poor performance up to a learning experience.

“This was another quarter of unbelievable learning for us at J.C. Penney,” he says. “Each quarter, we learn a lot, we adapt, we try to move forward.”

THE STORE OF THE FUTURE

Some critics say Johnson's plan is falling apart because he chose to overhaul pricing before working to improve Penney stores. Indeed, Penney stores have long been seen as unappealing and it's merchandise as dowdy.

But Johnson says the focus on pricing was no mistake. One of the men he has admired most in his life was Steve Jobs, co-founder of Apple and his former boss. He says Jobs taught him the importance of doing things well “one at a time” and “not getting ahead of yourself.”

Johnson, who wears khakis and jeans to the office most days, says he knew he wanted to bring in hip names like Vivienne Tam and Joe Fresh to Penney. But those brands, Johnson reasoned, wouldn't put their wares in stores as long as Penney offered hundreds of sales each year.

“Nobody is going to put their brand in a place (where) they'll devalue it or take 50 percent or 60 percent off and sell it on coupons,” he told investors in September.

With pricing in place, Johnson shifted his focus to Penney's stores and merchandise. This fall, Penney began replacing nearly half of its merchandise in stores with new lines like Betsey Johnson's Betseyville, which features trendy items such as $45 leopard print platform pumps and $24 lace rompers.

To showcase Penney's new merchandise, Johnson also reimagined its stores into mini malls of sorts. He plans to divide stores into 100 shops that highlight different brands or types of merchandise. Each shop will be like its own small store, with different merchandise and signage.

Surrounding the shops will be extra-wide aisles that Johnson calls “streets.” Along those pathways will be ice cream and coffee bars and wood tables with built-in iPad tablet computers that shoppers can use to surf online. In the middle of it all, a Town Square will offer activities like Pilates.

Johnson says the stores, which will carry about 25 percent less merchandise, will be places where shoppers can hang out. The hope is that the longer they stay, the more they'll buy.

Penney already has started the remake of its stores. In recent weeks, 10 shops have been launched for such brands as Liz Claiborne, Levi's and Penney's new JCP line of casual clothes in 700 of its 1,100 stores. Johnson aims to have 100 shops in those 700 stores by the end of 2015. The remaining 400 stores are in small towns and won't feature the full makeover.

In September, Johnson took 300 analysts and reporters on a tour of a 30,000-square-foot prototype of the complete Penney store of the future, which Johnson calls the “art studio.” He says he likes to stop by the prototype, on the third floor of a Penney store in a Dallas mall minutes from Penney's headquarters, before he goes to work each day.

Penney is starting to see some positive results from the makeover it began. The company says so far that it has converted about 11 percent of the floor space to shops-within-stores. The shops' average sales are more than double the sales in the rest of the store.

And some customers are beginning to come back. Michael Pelaez, a 27-year-old who rarely shopped at Penney before the new shops opened, says he likes the retailer's new Levi's shop and its predictable pricing.

“It’s forcing me to browse,” says the pharmaceutical supplier worker who lives in Hialeah, Fla. “What used to be an hour and a half at the mall has turned out to be an hour and a half at J.C. Penney.”

That some customers are responding to the redo is no surprise to Johnson, who insists his plan will work. “It’s really hard to transform things,” he says. “But that’s what we’re going to do.”

Not everyone believes that’s possible. Michael Exstein, an analyst at Credit Suisse, recently downgraded Penney’s stock to “underperform” from “neutral.” Exstein wrote that Penney “must find a way to significantly slow the sales decline within the next six months.”

But Johnson still has supporters. During an interview with CNBC after the company’s last earnings report, William Ackman, an activist investor whose hedge fund Pershing Square Capital Management has a 17.8 percent stake in Penney, said that he’s giving the turnaround several more years to work. He also said, however, that there is a limit to how far the board and the CEO would let sales fall.