Can a Former Home Depot Exec Renovate J.C. Penney?
Since 2007, when the stock hit a high of $82.16, to its recent closes at about $7, the company has reported quarter after quarter of millions in losses, a trend that accelerated in 2012 after Ron Johnson, formerly of Apple (AAPL), took over. Longtime customers fled the store in droves as he swept away promotions, coupons and their favorite private brands -- like St. John's Bay, Stafford, Ambrielle and Worthington. He made the stores cleaner and brighter, but that was far from enough.
Ellison, formerly Home Depot's (HD) executive vice president of U.S. stores, will need to both win back the older shoppers and attract millennials and minorities. And this without a recent background in fashion retail. (He did work for Target (TGT), but that was a dozen years ago.) A cautious board is starting Ellison in the job of president (he starts Nov. 1), and giving him until August to learn the business before he's fully in charge of supervising "Extreme Makeover, Retail Edition" as CEO.
Some of the prep work is already done. Mike Ullman (the current CEO, who was brought out of retirement as an interim leader) brought back the promotions and coupons that its shoppers love. And those private brands that Johnson gave the ax? They now comprise half of Penney's merchandise.
What's the Plan of Attack?
At the company's most recent analyst day in October, Ullman and other executives unrolled blueprints for the turnaround: more soft goods (such as towels, bedding and window coverings); a stronger presence in the center of the store selling lingerie, fine jewelry, fashion accessories and shoes; and increased competitiveness in online and mobile.
Penney has 1,060 stores, enough to give it, as Ullman put it, "a footprint in every state except Hawaii and in virtually every little town in America."
Hoping to trade on nostalgia from its older customers -- the boomers who fondly remember the J.C. Penney catalog, introduced in 1961 and discontinued in 2001 -- J.C. Penney is bringing back the catalog in digital form.
Although the chain has reported $3.16 billion in losses over the last three years, it has reported sales growth in the last three quarters. Active customers are within 1 percent of 2011 levels before Johnson's tenure, and customer satisfaction levels are at all-time highs. Yet, even so, the store managed to trip on its ladder when a pricing scandal surfaced earlier this year: Managers were marking up items -- sometimes to double the original price -- then sell the items at their original prices, but advertising them as sale prices.
Building On Its Strengths
The stores do have in-store Sephora cosmetics shops and Disney (DIS) brands, in addition to popular brands like Nike (NKE), Dockers, Izod and Carter's (CRI) for the entire family. J.C. Penney is the No. 2 big and tall men's clothier in the U.S.
According to Ullman, half of America's families are J.C. Penney customers -- but more likely, those customers are the older family members. Young marrieds, college kids, teens wanting clothes or young people furnishing a first apartment are shopping at Macy's (M), specialty boutiques, Urban Outfitters (URBN), and of course, Target.
J.C. Penney also faces indirect competition from the likes of Samsung (SSNLF) Apple and Amazon.com (AMZN) as well for the total consumer dollar, Ullman said at the Analyst Day. Morgan Stanley (MS) analyst Kimberly Greenberger iterated the theme that consumers are spending their discretionary income in restaurants and on tech, not fashion, rating J.C. Penney and its rival Kohl's (KSS) a sell on Oct. 21.
Shoring Up the Walls
Ellison is moving to the chain's headquarters in Plano, Texas, something Johnson refused to do. Ellison is expected by analysts and retail watchers to work on day-to-day operations and mend a broken trust with its customers. Deb Berman, J.C. Penney senior vice president of marketing, called it "the fine line between love and hate."
Ellison's strengths at Home Depot included experience in digital platforms and customer service, both areas where J.C. Penney needs more work. Home Depot had been in a similar slough with poor or nonexistent customer service, and Ellison is partly to credit for that turnaround.
Ellison will be the first African American to head a major American retailer, and coverage of his appointment was often reported with the cynical intimation that he is expected to help bring in minorities. Ellison needs to bring in everyone to get J.C. Penney back to sales figures like 2007's $19.9 billion.
He'll have a tough job -- hamstrung by more debt, more expenses, fewer stores and less revenues than previous CEOs at J.C. Penney. And he has barely 10 months to learn the new nuts and bolts of soft goods before he'll be on the hook to bring this project in under budget.