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It was a case of too many cooks in the same kitchen — two to be precise.
This story first appeared in the June 20, 2012 issue of WWD. Subscribe Today.
On Monday, J.C. Penney Co. Inc. disclosed that its president, Michael Francis, had abruptly left the company, and did so with little explanation. But on Tuesday, as Penney’s stock price continued to tumble on the news and with speculation swirling, Ron Johnson, J.C. Penney’s chairman and chief executive officer, told WWD why Francis, considered a whiz kid at marketing and credited with establishing Target Corp.’s cheap-chic image, left the $16.5 billion Penney’s after just eight months on the job.
“It’s very simple,” Johnson said in an interview. “Michael and I had full agreement on the business strategy for Penney’s. We are huge believers that we are on track, and that ultimately we will carve out a winning position.
“But the marketing has not resonated with our core customer,” he admitted. “My job as ceo is to really take responsibility for everything. I felt compelled to dive in and help with the new strategy. Michael and I both concluded we didn’t need two hands on the same steering wheel. The marketing I largely left to him. The fact that it hasn’t resonated [meant] I had to get involved.”
The news of the sudden departure of Francis from the Plano, Tex.-based department store chain sent Penney’s stock down 8.6 percent, or $2.08 per share, Tuesday to $22.25, following Monday’s 5 percent decline in after-hours trading. The development also added fuel to concerns over whether Penney’s, with its fast-moving reinvention strategy entailing an overhaul of just about all aspects of the company, was on the right course, though William Ackman, founder and ceo of Pershing Square Capital Management, and owner of about 18 percent of Penney’s shares, felt it was. “I’m 100 percent behind Ron and the company’s strategy,” Ackman said. “We were aware and supportive of his decision on the marketing and on Michael Francis.” Ackman played a role in recruiting Johnson to Penney’s last year.
In January, Johnson, together with Francis and Michael Kramer, the chief operating officer, unveiled the new vision in a theatrical presentation before hundreds of vendors, investors, media and retail analysts. Johnson explained that Penney’s would chuck its promotionally frenzied, high-low pricing approach in favor of a three-tiered strategy to everyday low pricing, monthly pricing and clearances two Fridays each month; convert selling floors from the open sea of racks to individual shop concepts for private and national brands, and convert the center core for accessories, jewelry and cosmetics into a “town square,” which has largely been kept under wraps.
On Tuesday, Johnson declined to comment on the performance of Penney’s stock, but reiterated that the company remains “highly committed to our business strategy. We see a lot of evidence of success — that we are on the right path.”
Asked if the financial markets were overreacting to the road bumps that Penney’s is experiencing in the early stages of its reinvention, Johnson said, “The market is going to do what it does.”
Asked if there was any disagreement in the strategy between him and Francis, Johnson replied, “Not at all. Michael and I worked very closely together. I have extraordinary respect for Michael. I believe he is an extremely talented executive. We are going through a transformation and learning every step of the way. I just need to be much more involved, especially with the marketing. I believe strongly that the number-one job is to communicate the benefits of our changes to our core customers. That’s what we need to do better.”
Johnson told WWD that he currently has no plans to find a successor to Francis: “At this point, I am going to take direct responsibility. I will not be searching for a replacement.”
He said that more so than the marketing, he has been “heavily” involved in the merchandising, and that he has been talking with his chief merchant, Liz Sweney, every day.
The departure of Francis is a startling loss for Penney’s, considering his reputation and the stack of responsibilities he was given, including merchandising, marketing, planning, allocation, product development and sourcing. When he was recruited from Target last year, it was considered a coup and he was given a $12 million signing bonus, some of which he may be required to give back now that he has left the company.
Nevertheless, Johnson said it was “mutually agreed” that Francis should leave. “It’s really hard to see him go,” Johnson acknowledged. “He’s really well liked. It was very tough.”
Francis’ departure is also traced to Penney’s recent performance, showing that the new marketing and pricing strategies weren’t driving enough traffic. While any company undergoing a repositioning would expect declines, Penney’s endured a particularly sharp one, reporting a $163 million first-quarter loss with a 18.9 percent drop in same-store sales. “Business in the first quarter was a little worse than expected,” Johnson acknowledged. But amid a reinvention, “It’s hard to know how quickly customers will respond to the changes. The biggest challenge is getting core customers to understand the benefits of our new strategy. Job one is to communicate the benefits.”
On the brighter side, Johnson said he expects Penney’s business to improve as the year progresses. Although the retailer does not report monthly sales, Johnson, who before joining Penney’s did a stellar job rolling out Apple retailing, did say, “We were pleased with our May performance” but “a little disappointed” with the Father’s Day period. For the second quarter, he expects a modest improvement in the sales trend.
“Overall, we are making progress” with the reinvention, Johnson said, adding that the store is currently performing best with fashion merchandise, while basics have been weak.
Asked how the company may be tweaking the marketing and the pricing, Johnson said, “The key thing is we’ve got to make sure the customer understands that our pricing is really terrific every day. We haven’t been able to communicate that simply to our core customers. We are going to refine the pricing and marketing to make it really clear that our everyday pricing is exceptional.”
One way will be through stepped up product-specific advertising, and by reducing lifestyle advertising, which has been heavy this year, Johnson explained. Penney’s is also shedding the monthly values it offered, which apparently confused customers.
In other big changes first disclosed by WWD in April, selling floors across the 1,100-unit chain will be reformatted into a mix of “stores within the store” having enclosed environments of at least 2,000 square feet for such brands as Sephora and Martha Stewart; shops with at least 500 square feet for single-brand statements such as MNG by Mango, Izod and Arizona, and boutiques with at least 300 square feet for multibrand spaces, such as a denim or swim boutique.
For its anchor locations, which are generally 180,000 to 220,000 square feet, Penney’s is looking to install a total of about 100 stores, shops and boutiques. Smaller locations will have fewer. “We’re really excited about launching our first ten shops this August,” Johnson said. “We’ve got some great partners,” as well as private brands that will unveil new shops. The ten shops will be rolled out at over 700 stores, in time for back-to-school.
Underscoring how much work has been done in the reinvention, Johnson said that half the merchandise — storewide — will be new for fall, with fresh styles, updates to private brand collections such as Arizona, St. John’s Bay and Worthington, and an array of new products from key vendors such as Nike and Levi’s, as well as labels soon to join the mix such as Marchesa and William Rast. In years past, competitors such as Macy’s and Kohl’s have done a better job than Penney’s at procuring brands. However, Johnson said that, come fall, Penney’s will have an “increased fashion component” and will be doing “a much better job of including core items in our advertising.”
Meanwhile, the sudden departure of Francis triggered some sharp reactions from financial institutions. “What is concerning to us is that we have always thought this strategy was going to take time to successfully implement long term, and management does not seem to have the patience, commitment or conviction to wait it out, as promised, and let the marketing begin to resonate,” Barclays said in a research report. “We continue to believe that the moderate consumer remains very much focused on sales and promotions and are not sure that any marketing would have been successful this quickly, especially without an overhaul of brands and product. We are also concerned about the importance of Mr. Francis’ role in securing many new brands and boutiquelike brands for the company in this transformation.”
J.P. Morgan said in its report that the news on Francis is “clearly surprising and likely symptomatic of continued top-line weakness though a marketing overhaul is not entirely unexpected with ceo Johnson outlining changes on the way…with a move from ‘entertainment’ to ‘education’ based marketing.’” The initial campaign lacked a “call to action” and lacked mention of how products were priced, J.P. Morgan wrote.
With Johnson taking the merchandising and marketing areas from Francis, “the story rests now rests squarely on Ron’s shoulders with his top-line turnaround slated for February 2013,” J.P. Morgan added. “While we do not believe [Monday’s] announcement changes the long-term vision, near-term implications clearly appear negative and we will be monitoring stores and channel commentary for changes ahead.”