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J.C. Penney Co. Inc. finally hit reboot.
The beleaguered retailer on Monday convinced Myron “Mike” Ullman 3rd to return as chief executive officer as its board called an end to the controversial and costly tenure of Ron Johnson. It is an ironic twist, since Ullman initially was pushed aside in favor of the high-flying Johnson, who was recruited from heading Apple Retail under Steve Jobs.
An indication of how far Johnson had fallen came in Penney’s statement revealing the management change. Johnson was not quoted, while the board simply said he was “stepping down and leaving the company.”
Chairman Thomas Engibous said, “On behalf of the board of directors, we would like to thank Ron Johnson for his contributions while at J.C. Penney and wish him the best in his future endeavors.”
Egnibous described Ullman as “well-positioned to quickly analyze the situation J.C. Penney faces and take steps to improve the company’s performance.”
It will be quite an uphill climb. Penney’s lost $985 million last year as sales fell 24.8 percent to $12.99 billion. Shares of the company fell 50 percent to $15.87 during Johnson’s tenure, leaving the company with a market capitalization of just $3.49 billion — well below that of competitor Kohl’s Corp. at $10.66 billion and Macy’s Inc. at $17.13 billion.
Ullman said he was contacted by Penney’s chairman over the weekend, given a couple of days to discuss with his wife whether he wanted to return, and found himself back in the role on Monday. “I have six kids and I sit on six boards,” he said. “There were a lot of things we had to consider. My instinct was, I would love to take the job, but let me discuss it with my wife.”
Asked when he starts, Ullman, displaying his usual wry humor, said, “I guess tomorrow. Maybe today. I don’t know.”
Penney’s said in a regulatory filing that Ullman, 66, will get a base salary of $1 million to lead the retailer.
Shares of Penney’s gained ground in after-hours trading Monday as word spread that Johnson was out. The stock, however, reversed course and fell 6.9 percent to $14.78 when Ullman was named Johnson’s successor.
Since leaving Penney’s on Jan. 27, 2012, Ullman said he did not make one phone call to the company, nor did he seek any information of the sort a former ceo might be curious about. “It’s not helpful to be a critic or stand on the sideline giving advice,” Ullman explained. He said he quickly detached from retailing by going on a cruise the month after he left Penney’s.
Since then, he’s been on a few cruises, and busy on boards, with his family and with charitable causes.
Asked why he decided to return, Ullman replied simply, “Clearly, this was something I couldn’t resist. The franchise is strong. The people want Penney’s to win.”
He said over the weekend he did visit a new Penney’s store in Dallas, but not the prototype that Johnson established there. “The presentation was quite well done. Some of the new ideas that have been implemented look great. The question is how are they performing,” and what is the customer reaction, he added.
Ullman — renowned for his cool-headed, analytical approach to management — said he would build on the successes of the past year or so and learn what went wrong, and start gathering information today at 8 a.m. when he starts work. He said it would be unfair to comment specifically on the company’s condition, pending his analysis.
He did say he would build a new business plan over the next few months, for profitable growth, and will also be involved in succession planning. Similar to many of his past executive positions, such as at LVMH Moët Hennessy Louis Vuitton, Ullman did not sign a contract, so it’s possible he becomes the short-term solution to stopping the hemorrhaging, and comes up with a successor. He was involved in the decision to bring in Johnson and the two spent a few months together at Penney’s working on the reinvention plans.
Ullman is considered one of the smartest and most competitive retail executives in the industry, a strong operations, financial and technology executive, but not of the merchant prince breed. He did bring Penney’s to its historically high level of operating profit, 9.7 percent, and a share price of $88. Another big accomplishment was the rollout of stores, 138 over three years, primarily in off-the-mall locations, and American Express gave the company high ratings for service improvements.
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The introduction of Sephora to Penney’s stores was another big win for Ullman, as was the growth of the dot-com business, which doubled in volume to $1.5 billion.
Ullman also launched Penney’s first Manhattan store, which is in the Manhattan Mall, between 32nd and 33rd Streets, and his team added such concepts as Call It Spring shoes, which are made by Aldo; MNG by Mango; Nicole by Nicole Miller; and American Living, which was designed by Ralph Lauren Corp. and discontinued last year. The team also launched Olsenboye by Mary-Kate and Ashley Olsen, and Modern Bride jewelry, and built up private labels, including a.n.a., to add a contemporary flavor to the assortment. Ullman did shut down the catalogue business, which was still profitable but faced with increasing costs, including paper and postage.
In the few seasons before Ullman left Penney’s, there was some slide in sales and profits in the midst of the Great Recession. Despite his accomplishments, Ullman did not leave on a high note. “The recession was extraordinarily difficult for midtier mall-based stores,” Ullman said Monday. “You learn more in the valley than on the mountaintop.…I intend to use this opportunity to keep learning.”
When Ullman joined Penney’s as chairman and ceo in December 2004, succeeding Allen Questrom, the company was already deep into a multiyear turnaround and showing strong results. Questrom had prevented Penney’s from going into bankruptcy. Ullman’s challenge was to sustain the momentum and create more of a buzz around the brand so it resonated louder with a younger crowd and its middle-income audience. With mall development drying up, he executed the off-mall strategy for store growth.
He said that after Questrom rebuilt the team with senior merchants and set a promotional strategy, it was his task to elevate the profitability and target double-digit operating profit. “I felt like we were on the right track. The recession was not kind to moderate department stores.”
He said he would step down from the Saks Inc. board but stay with the Starbucks board, and remain as deputy chairman of the Federal Reserve Bank of Dallas and as chairman of Mercy Ships International.
Reaction to the news of Penney’s change in command was swift, sometimes even before the official announcement went out late Monday afternoon.
“I was not surprised, based on the results,” said Questrom. “I was disappointed they didn’t do it earlier.” Questrom was often quoted in the news media in the past few months, criticizing Johnson and his reinvention strategy and raising the question of why Johnson never tested his concepts first, before rolling them out.
“Let’s face it. The last two years has been at tragic set of events for Penney’s and all of its constituents,” said Howard Schultz, chairman and ceo of Starbucks, who once left the coffee company and returned to turn it around. “The advantage Mike Ullman has is his relationships inside and outside of the company, and his intuitive sense of the brand. He has a running start restoring Penney’s back to its rightful place. He’s got the significant trust and confidence of the employees, and an intuitive sense of what to do and how to do it. This is not an easy task, but he is the perfect person to come back. He didn’t have to. He is coming back because he feels a responsibility. It takes a lot courage to come back.”
“Penney’s needs a new marketing team, a new merchandising team and new sourcing, and they have to revive the morale of the associates,” said retail analyst Walter Loeb, who has been an outspoken critic of Johnson’s strategy. “Mike Ullman can do this. He can pull together a team. Maybe he needs someone like Michael Francis to come back. The marketing has been out of whack with the customer. They have got to get the customer back for the company to survive. It will be a long haul.”
Vendors were more bullish on the move than investors. Many were reluctant to speak on the record — illustrating the continuing sway of Penney’s in the marketplace even after a punishing year.
“We have a delicate relationship with them right now,” said one men’s wear executive.
The executive said while Johnson’s strategy “wasn’t that bad, they implemented it terribly.” If Penney’s had not abolished promotions at the same time it was transforming its merchandise mix, things could have been different.
The vendor noted that while he has the ultimate respect for Ullman, the returning ceo has a monumental task ahead of him.
Investment banker Billy Susman of Threadstone Advisors, said: “As long as it’s taken to get to this position, it’s going to take that long to right the ship.” Susman said that because all the buying decisions have already been made through the holiday season, “there will be no material change of course or impact for at least another couple of quarters.”
Ullman’s return also opened up the issue of succession. “Who would want it?” asked one vendor.
Another source threw out the names of some of the executives who have the skills necessary to take on the job including former Marks & Spencer executive chairman Stuart Rose, Ralph Lauren’s Roger Farah and Macy’s Jeff Gennette. But it’s unlikely that any of these executives can be lured to Penney’s — at least not right away. Bud Konheim, ceo of Nicole Miller, which has a line with Penney’s, said the chain now has “a captain that knows how to steer the ship. It’s in steady hands with Mike Ullman.”
Despite the sales decline last year, Konheim noted, “Anybody would envy that volume. It’s something to build from. I thought Ron had a really good take with what was wrong with retail. He had a really good solution. But there’s the age-old retail saw to test and reorder, and there was no test. The big sweeping change was never tested.”
He said as far as all the people who lost their jobs during Johnson’s tenure, “They had a lot of babies going out with the bath water.”
Penney’s workforce fell by 43,000 last year to 116,000.
“But leave it to Ullman,” Konheim said. “He’s good. He’s taken over the situation before. He knows all the people and everybody loves him.”
Allen Schwartz, who licenses a line to Penney’s called Allen B. by Allen Schwartz, was happy to have Ullman back as well.
“That’s extremely positive,” Schwartz said. “It’s been a very turbulent year. They tried to reimagine the business and, in hindsight, they should have moved slower. I think the coupon thing really hurt. That customer is programmed and educated to coupons. She wants to feel like she’s getting a value like everybody else. J.C. Penney is one of the great brands in the world, and I think it threw them [the customers]. When you want to make a drastic change with your consumer, you really need to move slower.”
Schwartz also believes that the Martha Stewart situation “was a poor decision” on Penney’s part. “It’s like a soap opera.”
One of Johnson’s first acts as ceo was to cut a deal to bring Martha Stewart-branded home goods to Penney’s, buying 16.6 percent of Martha Stewart Living Omnimedia Inc. in the process. The move riled Macy’s Inc. ceo Terry J. Lundgren, who had an exclusive deal for Martha Stewart home goods, and the Penney’s deal is now the subject of a contract dispute trial in New York State court.
If Macy’s prevails in the case, it’s possible that Penney’s would not be able to sell Martha Stewart-branded goods already on its way to the stores, worsening what is already a tight cash position.
Penney’s rejiggered its bank agreement in February so it could borrow up to $2.25 billion. Even so, the company’s still in a precarious spot. CIT and other factors are said to have imposed a 1 percent surcharge on vendors shipping goods to the chain.
Johnson’s departure is a major setback for activist investor William Ackman, whose Pershing Square Capital Management quietly amassed a position in Penney’s stock in the summer of 2010 and emerged, together with Vornado Realty Trust, holding a 26 percent stake in the firm at the time.
Ackman previously lost a proxy battle to shake up Target Corp.’s board and took a softer approach with Penney’s, brokering a deal that put him on the board.
Ackman, who could not be reached Monday, frequently appeared on CNBC to tout Johnson’s reinvention plan, which was rolled out at a much-anticipated and glitzy investor presentation in Manhattan.
And when the turnaround struggled, Ackman defended Johnson vigorously. The pressure appeared too much for Vornado, which sold off 10 million of its shares of Penney’s last month, leaving the firm with 13.4 million shares, or 6.1 percent of those outstanding.
Ackman holds 17.8 percent of Penney’s stock, but his support for Johnson waned publicly last week and he said the execution of the transformation had been “something very close to a disaster.” From early on, Johnson signaled that he’d be making big changes at the firm. “I’m not here to improve, I am here to transform,” he later recalled telling workers at the company’s home office in Plano, Tex. “I shared with them that as America’s first store, it is time to assert leadership, reclaim our birthright and become America’s favorite store. The energy, excitement, and enthusiasm that I received from our associates was overwhelming. It clearly showed me that they’re ready to win.”
Ackman has been critical of Ullman’s tenure at Penney’s in the past. In a May presentation at an investment conference, Ackman ripped into the former ceo, noting that the company’s stock fell 14 percent during what turns out will be Ullman’s first run as ceo, despite the company’s stock buybacks.
His presentation noted, “Under Ullman, JCP failed to right size its uncompetitive cost structure despite a severe consumer recession.” He also noted that Ullman invested more than $1 billion to expand the company’s off-the-mall store base and didn’t generate an adequate return.
Ackman described the company’s sales track record under Ullman as “mixed” with Sephora being dubbed a “success,” Liz Claiborne being a “moderate success” and the American Living line a “failure.”
Although Johnson qualified as the highest-paid U.S. fashion executive in 2011 with compensation valued at $53.2 million, 98.8 percent of that came in the form of stock awards, the value of which might not be realized. Johnson also put his own money on the line when he took the job, buying $50 million in seven-and-a-half-year warrants with a strike price of $29.92. Those warrants were exercised immediately upon his departure and are underwater — meaning Johnson lost all that money.
Johnson brought on Kellwood Co.’s ceo Michael Kramer to be chief operating officer, and Francis, Target’s chief marketing officer, to be president. Francis was on the job just over eight months before abruptly leaving and Johnson took on a more direct role in communicating his new plan for the chain to the masses.
Ellis Verdi, president of DeVito/Verdi, an ad agency that has done campaigns for Kohl’s, Meijer, Duane Reade, Men’s Wearhouse, Sports Authority and Daffy’s, said Johnson depended too much on advertising.
Ellis said Johnson had a vision that required advertising to educate people and change a behavior that had been ingrained for years — the allure of the sale. “Changing behavior with advertising is a very expensive, long-term proposition in an industry where consumers want to be in control in getting the deal,” Verdi said.
The big question is: How long will it take to go back to where it was?
“They’re probably ready to take up the old behavior and it will go back quicker than it left,” said Verdi, who believes the J.C. Penney name is still valuable.