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Penney’s Quest Begins: Taps Search Firm to Find Successor for Questrom

An executive search firm has been retained to find a successor to Allen Questrom, chairman and chief executive officer of J.C. Penney.

NEW YORK — J.C. Penney is getting ready for a Questrom-less future.

A search has begun for a successor to Allen Questrom as Penney’s chairman and chief executive officer. Questrom, who has successfully worked his magic on the retailer for more than three and a half years, may be getting ready to step down when his five-year contract expires in September 2005.

WWD has learned that Heidrick & Struggles, the executive search firm here, has been retained to conduct the search. Officials at Heidrick & Struggles declined comment, and Questrom was traveling and couldn’t be reached.

Since he assumed leadership of Penney’s in September 2000, the 64-year-old Questrom has orchestrated a revitalization of the $17.7 billion retail chain, and Wall Street has taken notice. During his tenure, Penney’s stock has nearly tripled. By the end of his first day on Sept. 15, 2000, Penny’s stock closed at $12.43 and bottomed out two months later at $8. It has appreciated ever since, reaching a peak of $36.77 just more than a month ago, and closing Friday at $36.34, up 1.28 percent from Thursday’s close.

Penney’s also has become a far more efficient business. Gross margins during Questrom’s tenure have expanded more than 800 basis points and operating margins have ballooned by more than 260 basis points.

At its annual meeting last month, Questrom gave shareholders a bullish view of the future, and may have tipped his hand when he said the turnaround he was hired to do was close to completion.

“After three years, we have successfully overcome many of the initial hurdles associated with our shift to a centralized business model,” he said. “We have not reached the top of the mountain, and the climbing is still difficult, but we are further from the base camp and making good progress toward the summit. We are progressing toward the completion of a major turnaround that many thought impossible.”

Once that turnaround is complete, sources said Questrom may well pack his bags, take some time off at his home in Aspen, Colo., and embark on a new retail challenge, or he could possibly pursue a political, social or activist cause. Some industry sources viewed Questrom’s move to Penney’s as his last hurrah and don’t believe he’d take on another retail turnaround situation as large as Penney’s, but others could see him joining another retail operation.

Questrom’s annual base salary is currently $1,350,000, according to a recent proxy statement. For fiscal 2003, Questrom also received a bonus award of $2,025,000 based on the company’s performance and calculated at 150 percent of base salary.

Sources said that Vanessa Castagna, chairman and ceo of Penney stores, catalogue and Internet and executive vice president of J.C. Penney, is the likely internal candidate to succeed Questrom, but Heidrick & Struggles intends to present a slate of outsiders to the company’s board of directors, as well. One source said that Questrom recently presented the board with a handful of possible candidates, including Castagna, to succeed him.

Sources said it makes perfect sense for a public company to be thinking about succession plans, even though its current ceo has 15 months left on his contract.

“It’s not surprising. It would be prudent business planning,” said Kirk Palmer, ceo of Kirk Palmer Associates, an executive search firm here. “Allen’s probably had discussions with the board, and he wants to be as upfront as he can.

“The board probably wants to quietly take a look at who’s out there, and this would be a good time to do it,” added Palmer.

He believes Castagna would likely be a strong candidate, but by conducting a ceo search early on, the board can say it has spoken to six to eight people, and it believes Castagna is the strongest one.

Asked to assess the job Questrom has done at Penney’s, Palmer said, “It’s hard to come up with anyone else who has had his track record of success. Every place he has left was in better shape than when he got there. He’s universally respected.”

Bobbie Lenga, managing director and leader of the retail practice at Russsell Reynolds Associates, the executive search firm, said Penney’s has previously used Heidrick & Struggles and she isn’t surprised that a ceo search is under way. “It takes that long to find the talent. It’s not simply one call.”

She said Penney’s could look to bring in an executive such as Paul Pressler, ceo of Gap, because it has Castagna in place. Of course, Penney’s would run the risk of losing Castagna.

“Penney’s needs to decide if it wants to bring in a merchant or an operator. That will be fairly telling,” Lenga said.

As for Questrom’s future, Lenga observed, “I don’t think he’s finished. Maybe he won’t take on a major turnaround like Penney’s, but maybe something a little smaller. There are plenty of opportunities he can sink his teeth into.

“We all know the usual suspects, but what does five years down the road look like for Penney’s?” asked Lenga. “I think it’s a great assignment and a great time for someone to take over when the company is on a high.”

Considered skilled as a turnaround specialist, Questrom came to Penney’s after reviving Barneys New York as its ceo. His biggest success was Federated Department Stores, which he steered out of bankruptcy in 1994 and, soon after, accomplished two megamergers, folding Macy’s and Broadway Stores into Federated. Earlier, Questrom was ceo of Neiman Marcus and Federated’s Rich’s and Bullock’s divisions.

When Questrom was named in 2000, he became the first ceo in Penney’s 98-year history who didn’t come up through the ranks. He brought a new approach to running the business and a different way of looking at it. His goal was to retrain the organization and get all the units synchronized. He joined at a time when the company suffered from poor merchandise assortments, lackluster marketing and problems inherent with its decentralized organization. Centralization became one of the cornerstones of Penney’s five-year turnaround plan.

At the firm’s annual meeting last month, Questrom said Penney’s plans to strengthen its store, catalogue and Internet divisions with trendier, more compelling merchandise, and open up to 100 more stores over the next few years, including at least seven of its smaller, but highly lucrative, off-the-mall stores. Questrom said at the meeting that he wasn’t interested in making acquisitions right now, despite the fact that Penney’s is flush with an extra $3.5 billion from selling its ailing Eckerd Drugstore chain, the net amount it expects to pocket after taxes, fees and expenses on the $4.53 billion sale to the Jean Coutu Group and CVS Corp.

Penney’s finished 2003 with a comp-store sales gain of about 1 percent and plans to finish 2004 with gains of 2 to 3 percent, the third straight year of comp-store sales gains. Operating profits grew 13 percent in 2003, attributed to gross margin improvements from better execution in a centralized environment.

Internet sales reached almost $600 million in 2003 and are on track to hit $1 billion by 2006, said Questrom.

Today, women’s apparel, especially career, junior and contemporary; accessories; men’s wear; fine jewelry, and home are among Penney’s best-selling categories. The chain also launched the Chris Madden home collection last month, which has gotten off to a strong start.

— With contributions from Dan Burrows

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