PALM BEACH, Fla. — A total of 235 top cosmetics executives gathered here at the historic Breakers Hotel from May 12 to 14 for the seventh WWD Beauty CEO Summit, which featured three days of intense and lively talk about the fundamental challenges staring the industry in the face.

Myron E. "Mike" Ullman 3rd, chairman and chief executive officer of J.C. Penney Co. Inc., has had many titles during his storied career, but the one he should have is "game changer," judging from the deft moves he has made in fueling the dramatic transformation of Penney's.

At the opening night presentation on May 12 of the WWD Beauty CEO Summit, Ullman put his analytical abilities and savvy grasp of retailing on full view during a probing and free-wheeling onstage interview with Edward Nardoza, editor in chief of WWD.

"He is clearly one of the smartest and innovative ceo's in the business, across any industry and — I think you could argue — in the country," Nardoza said in introducing Ullman, whose career has spanned continents. Prior to assuming the mantle of Penney's leadership in 2004, Ullman was directeur general and group managing director of LVMH Moët Hennessy Louis Vuitton from 1999 to 2002. Before that, he was chairman and ceo of travel retailer DFS Group Ltd. from 1995 to 1999. From 1992 to 1995, he was chairman and ceo of R.H. Macy & Co. Inc. He previously was group managing director of Wharf Holdings Ltd. in Hong Kong.

At Penney's he has struck innovative deals by bringing Sephora into select units plus forming relationships with brands like Ralph Lauren's American Living, Nicole Miller, Kimora Lee Simmons and others. He also is on the board of Starbucks Coffee Company.

During his "conversation," held in the spacious Ponce de Leon ballroom of the ornate Breakers hotel, Ullman diagnosed the consumer's current mood and took the market's temperature. WWD: This audience is eager to hear some of the thinking behind the current Sephora business, but I thought before we got into that we'd deal with the current parade of horribles called the economy. We quoted you a couple of weeks ago that in your distinguished retail career you have not seen an unpredictable environment like this. Is it a question of a perfect storm with the subprime mortgage issue, the energy costs and other credit crunches?Myron Ullman: Probably the thing that's most unusual about this in my experience is that most other downturns were characterized by high unemployment, high interest rates, some real concern about keeping your job by our customers.

You know that there's a zero savings rate in the U.S. over the last three or four years. So people have been spending from their assets, and that seemed to work pretty well. The thing that was the most shocking to most of us that are in the retail business is how quickly it fell apart in terms of sentiment just after Labor Day last year. Last year at back-to-school we were 6 percent up in comp [store sales] in back-to-school categories, which is a respectable performance. Those are the young businesses — young men's, juniors, kids. And the fall merchandise that we had in the stores during back-to-school was checking very well. So we really expected that the fall season was getting off to at least a respectable start.

But the customer just didn't come back after Labor Day. Usually she comes back and buys a coat for her child or finishes out the wardrobe for her kids for back-to-school.

The worst seasonal weather for fall in 160 years [combined with a lack of desire to spend creates] the worst consumer sentiment in 29 years.

What we're finding is that the customer is, in a sense, trading toward casual and things that are easier to buy and even at holiday she tended to trend away from dress up toward casual. She bought the door buster, not the thing for herself. She bought something special for her family, but again, not for herself.

When she needs to shop and she has to shop, she's willing to shop for her friends and for her family, but the non-occasional shopping is just...there's no traffic. That's very difficult to predict.

WWD: Is that just a fall-off in actual traffic in the stores or is it that the individual shoppers are spending less when they're in the store?

M.U.: Well, a little bit of both. I think to a certain extent if you look at mall traffic numbers, mall traffic some weeks is down double digits. And we do slightly better than the mall traffic but we have 600 plus stores in malls, about 600 stores off mall, so we have a big exposure to mall traffic. We actually do better in our off-mall stores in terms of traffic during the week than the mall is doing.So part of it is traffic. But the other part is when she's in the store, she's either looking for the lowest possible price on something, like a door buster, or a very great bargain, or something innovative and new.

It's kind of a barbell situation where Sephora, for example, is something that's doing very well because it's a lot of newness. It's not price promoted; it's regular price. If you were really only worried about price you would think Sephora would be doing poorly. Of course, the core of our business is in the middle, between the promotional price and most innovative.

WWD: What adjustments can you make in a climate like this in terms of forecasting operations and actual product? Let's look at forecasting first. Does this kind of environment render comp-store and (earnings per share) estimates essentially meaningless?

M.U.: Well certainly what we told our investor community at the beginning of the year turned out to be meaningless because it was wrong. I think it's very difficult.

One of the reasons I made the comment that it's the most difficult in my career is that, as all of you in this room know, generally business has kind of — trends in a wave. For a while it's going positive and then you have a negative period but then it goes back positive again. It doesn't happen up and down everyday. This has been more choppy for everyone. So you have a couple good weeks and then all of a sudden you have another week that's just terrible.

So, to answer your question, we have suspended guidance on annual earnings this year until we have some better visibility.

WWD: It's interesting, the move at Macy's, which, possibly for different reasons, pulled back the monthly comps. [Macy's] won't be reporting comps anymore to Wall Street.

M.U.: I noticed that.

WWD: Is that something you'd consider?

M.U.: Well I'm on the Starbucks board, as you said, and Starbucks also stopped reporting monthly comps and there's some justification for that in the sense of when things are noncomparable in terms of promotion and whatever, it can be difficult to have people that don't understand the business understand what you're dealing with. Last year for us was a 53rd-week year, every time we announced something we had to keep telling everybody it was not calendar comparable. So it does become a hindrance.On the other hand, if you're in the school that we are, the better the information the investor has, the closer they're going to be [to what] really happens. You're better off giving them touch points along the way, rather than get them way, way out of whack with where we're going to end up and have people buying or selling your shares with a misperception of where you are.

WWD: What about operational strategies and adjustments in terms of compressing the supply chain cycles or inventory management or promotional tactics? Do you see permanent adjustments there? Do you have to tighten your grip on all aspects of those businesses?

M.U.: We're somewhat unique in the way we run the business because we have a large, centralized process that allows us to look at the business with essentially state-of -the-art tools and talent and can look out on the horizon and pretty much forecast very accurately, to a certain extent, across the 19 business groups and 1,000 locations. We can look a long way out.

What's difficult for us and why we're having a difficult time — like everyone else — is that when you have precipitous drop in demand, you can go ahead and readjust all the numbers, but you can't get there very quickly because you have to clear the goods. So yes, you do all the things you'd expect us to do, which would be very cautious about making commitments that we define as increasing our risk. On the other hand, we strongly feel that we have a long-term strategy that's worth pursuing.

We announced a year ago a five-year strategy that would get us to the retail industry's leading profitability and growth. We haven't forgotten about that, we just have a bridge plan here where we have to pragmatically get through the tough times for the inventory and expense.

WWD: How aggressively promotional can you get? The New York market got a little unnerved a few weeks ago when Saks [Fifth Avenue] advertised a 40 percent off sale early in the spring season. It rattled and forced the hand of a few of its competitors. How quickly can you break price in an environment like this, and to what extent are you putting pressure on the bottom line?M.U.: We don't think we can add promotion, effectively. I think we're as promotional as you can get. That's the way the customer likes to shop in our segment. We can be sharper in terms of messaging at times like this, where we make it clear what the promotion is. But a certain portion of our business is done at regular price, a much bigger portion is done at promotional price, and hopefully a small portion is done at clearance price, but right now clearance is winning over promotional.

WWD: Are there any different approaches you take toward actual product itself, buying more conservatively?

M.U.: Well again, we're in a number of businesses. So we have businesses that are trending very well now. So those people are very optimistic because they've got a trend going and they're feeling that trend. In other businesses, I would say the hard home business, whether it's window covering or furniture, it's hard to be optimistic about the near term for housing, so I would say they're being very, very cautious.

The best you can say is that you have to trust your people to run their business. They're incentivized to run it profitably. It's not a matter of anybody missing something because they're not thinking about it or don't have the information. The difficulty, as I've said before, is that nobody has visibility to what the customer is going to do.

WWD: Which categories of retailing do you think are most vulnerable right now in this environment? And, are there any categories that could actually gain market share and benefit by this downturn?

M.U.: Well, just generally I think people in this room know better than probably any other sector, innovation and newness and excitement sells even in this environment. No matter what the price, if it's something somebody's excited about — it isn't a question, unless it's outrageously priced. The customer can find money for that.

I'm a little bit biased by the fact that we're focused on the middle portion of America. We do business with half of the families in America every year. So our customers are working. They have jobs, both spouses typically have a job, they have kids, they have bills to pay, but they are employed. So they're not unemployed, they're not in the living paycheck-to-paycheck mode. So they have the money to buy the things that they want and need, it's a question of scaling back.The same could be said about Starbucks. I mean it's not a question, it's an affordable luxury, right? It's not that somebody can't afford $4. The question is where they choose to spend $4 in that way, based on their sentiment and their feeling about whether they are doing the prudent thing.

WWD: Can you tell us a little bit about the thinking that went into the Sephora deal, which I think surprised a lot of people in this industry. I know you had direct managerial experience from your time at LVMH. What did you bring with you from LVMH that made you think Sephora and Penney's would make an interesting or a workable marriage?

M.U.: If you look back in the early Nineties, virtually every mall developer wanted the same four anchors and every anchor store, every department store wanted the same four brands. So the sameness in department store retailing really was, to a certain extent, that you lost the customer and specialty stores picked up the excitement and brought about something that was attractive to the customer and more fun to shop.

Now over that period of time, a lot of things changed. Now there are thousands of specialty stores of each concept and very few department stores left. So the opportunity that we saw was to make a department store that was actually quite different, that was priced — I'll use my key competitor's names — right between Macy's and Target.

So if you can get the style and quality of a better department store and better specialty stores at a significantly lower price, the consumer should like that. But you've got to be 50 to 60 percent better than Target at what you do or you're not going to be as successful.

The whole idea of Sephora was we felt we had to differentiate Penney's from Kohl's, from Macy's and from other key competitors by having attractions that would anchor us as an exciting and fun place to shop and an easy place to shop. So we're focusing on the customer experience, we're focusing on ease of shopping, excitement with merchandise and ideas and we feel that that's our strategy.Beauty is one of the most frequently shopped categories. And Penney's has never really been very successful in the beauty category. So I talked with my former colleagues at LVMH and said I believe that the marriage could work very well for both — with some guardrails.

The reason I felt it would work well is I felt that expanding the footprint of Sephora, which is a highly desirable, successful concept, to reach customers that they would never get to. We do business with 60 million customers, 60 million families. No matter how many specialty stores they put in, in the next 10 years, they would not reach that customer base.

But we had to do it in a way that the things that we felt were essential were [taken care of]. We had to build the shop in the store so it was indistinguishable from a "real" Sephora. It had to have the service component at a level at or above a freestanding Sephora store. And I think everybody thought that was the biggest challenge but one of the things that I was encouraged by is the technology that Penney's has developed over the years in terms of training technology. And it had to work for both parties. It had to be successful in terms of profitability and productivity. So if we could get those things right it all depended on the customer being willing to spend the $650 a year that they spend, that they would spend it with us in beauty.

Because we knew that the Sephora customer was spending about the same amount as our customer but our customer was buying at the grocery store and discount store, sometimes at the department store. So she really had a wide range of choices. If we could attract her with a fragrance, a color, skin care or accessories. We knew the average shopping time was higher, we knew it was an indulgence, it was a treat for herself, and that our customer would respond to that. It has been I think everything we thought it would be or more.

WWD: How does the Sephora customer in your store vary from the overall Penney's customer? And does she vary at all from the customer in the freestanding Sephora units?M.U.: Well let's first talk about how the Sephora customer that is shopping in our store varies from our Penney's customers that didn't used to shop at Sephora in our store. So how is it different than our customer? She's younger, she's more affluent, she visits more frequently. Our core customer is 35 to 55 years old, makes $35,000 to $100,000 a year. So to the extent that we skew the mix a bit younger, a bit higher income, it gives us a lot of cross shopping into accessories and the missy sportswear, updated, more contemporary looks. And it would bring some energy and excitement to the store.

So we say we have 10 attractions in the store that you can't find in anybody else's store — that would be American Living by Polo Ralph Lauren Global Concepts Group, Sephora, those are our two anchored concepts, and then we have eight brands of our own that we've developed over the past 50 years. We think it's all about the frequency of shopping and getting a bigger piece of her wallet.

WWD: How do the sales per square foot perform in your Sephora units compared to other departments within Penney's?

M.U.: Well, keep in mind the Sephora inside J.C. Penney's is anchored right at the entrance, typically, and it's in accessory space. So, like any other accessory category, it's two to three times more productive than the rest of the store. And we're very pleased with the cross shopping to accessories and A&A and missy sportswear, casual sportswear.

WWD: One of the other developments that I think is fair to say was one of your more significant game changers was the Ralph Lauren American Living deal. How is that business going? We sometimes read skeptical comments from analysts who say that the aspirational customer is the one who's going away first and the timing might be off. And yet, no one questions the creative dimensions and the incredible, coordinated lifestyle approach that Ralph Lauren brings. Is it a question of being patient with the business or has it already exceeded expectations? Where is it now and how is it performing?M.U.: Well I would say it's right up to our expectations. This is a brand that had no identity five months ago. So we knew that the Bruce Weber photography and with the Polo Organization Global Concepts Group directing the marketing, that it would be spectacular.

But we had to work hard at making sure the customer understood the concept. It was going to be a bit more whimsical, a bit more casual, take itself a little less seriously than maybe people thought it would. And it was going to be in 40 categories at the same time. Launching a new brand in 40 categories simultaneously — only the Polo Organization could do that. Their talent is extraordinary.

So we knew we'd have some hits and some misses but there's no doubt in our mind, the customer reactions, the surveys we've done, the concept, the quality, the style, the fit, outstanding comments. It wasn't perfect timing in terms of the economy. Would I rather have launched it in the middle of a boom? Of course.

But if you look at what happened with Sephora, it was new and the penetration today of our store is twice what it was when we started. So there's no doubt that it's a billion-dollar idea for us.

So we expect it will grow and we have seen nothing about it that would have us be discouraged. I think we've planned it appropriately. So we didn't plan it with what we thought it would be three years from now.

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