It may be worth it in the long run, but for now change is costing J.C. Penney Co. Inc. a lot of money.
This story first appeared in the November 15, 2011 issue of WWD. Subscribe Today.
On Monday the retailer reported a net loss for the third quarter ended Oct. 29 of $143 million, or 67 cents a diluted share, saying the moderate shopper pulled back while charges to restructure its operations and install new management piled up.
And new top talent is pouring in. Penney’s chief executive officer Ron Johnson, who officially took the helm Nov. 1, on Monday named two more senior executives to the team he’s rapidly reshaping. Michael Kramer, ceo of Kellwood Co., will become chief operating officer and Daniel Walker will become chief talent officer. Both previously worked with Johnson at Apple, and Walker, for at least a few months, has been consulting with Johnson on human resources, as previously reported by WWD. Last month, Michael Francis, formerly of Target Corp., was named president.
While the pay packages of the two newest executives have not been revealed, Penney’s is paying dearly for its new team. As reported, Francis got a $12 million signing bonus plus a $1.2 million-a-year base salary, and he was to receive 1 million restricted stock units on Wednesday. Johnson’s base salary was set at $1.5 million and he is eligible to receive an incentive bonus of up to 125 percent of that salary depending on the company’s performance. He will also get 1.7 million restricted stock units vesting in January 2012.
The team has a lot of work to do to right the listing ship. For the fourth quarter, Penney’s expects its comp sales to be flat to up slightly — a far cry from retailers such as Macy’s Inc. and Kohl’s Corp., which last week both reported strong growth in profits and sales and raised guidance for the year.
In the third quarter of 2010, Penney’s posted profits of $44 million, or 19 cents. Excluding costs to dispose of the firm’s outlet business, carry out a voluntary early retirement program, tweak processes in the supply chain and home office and switch management, Penney’s earnings in the third quarter of this year fell to $24 million, or 11 cents a share.
With Penney’s business dragging — sales for the quarter dropped 4.8 percent to $3.99 billion and comparable-store sales fell 1.6 percent — the industry is eagerly awaiting for Johnson to articulate his vision for what’s a very complicated, $18 billion business. Expectations are very high, considering his track record as the architect of Apple Retail’s phenomenal expansion, executing the vision of the late Steve Jobs.
On a conference call Monday, Johnson further stoked expectations by priming analysts to expect big changes at Penney’s, which serves more than half of all American families annually. “I’m not here to improve, I’m here to transform,” he said, recalling a speech he made at Penney’s Plano, Tex., headquarters on his official first day on the job. “It is time to assert leadership, reclaim our birthright and become America’s favorite store.”
His biggest challenge now may be managing those expectations, let alone managing a business that been dragging. “I’m working with our team to rethink — really to reimagine everything we do,” Johnson said. “I’m investing considerable energy in a strategic review of our product, our pricing and our promotional strategies in order to create an exceptional, a new and a better way for people to shop.”
Johnson added that he would lay out more of his vision for Penney’s at a Jan. 25 analysts’ meeting in New York.
Kramer said that vision will be a cross between Apple, Target and Macy’s, highlighting the customer-centric focus, the cool factor and the moderate department store sector, respectively. Asked why he would give up a ceo position at a company that’s planning to go public, Kramer said while he could have continued at Kellwood, “The bigger platform is at J.C. Penney. I’m not one of these egotistical guys where I want to be ceo. I want to be part of a team.” He likened his philosophy to that of Jobs, whom he worked for at Apple: “I want to make a dent in the universe.”
Several industry sources contacted over the past week said Johnson will focus on the store experience, as he did at Apple. “Ron Johnson told me the greatest opportunity in American retail is brick-and-mortar. He has a plan to make J.C. Penney an exciting place to shop,” said Bud Konheim, ceo of Nicole Miller, which has designed the exclusive Nicole by Nicole Miller line for Penney’s since 2005.
Others added that Penney’s selling floors lack color, effective signage and ease of identification of classifications. And one supplier said Penney’s buyers and merchandisers, on a recent visit to the showroom, characterized Johnson as “very passionate, very interested in aesthetics, updating the stores and making the retail experience better.”
“When it comes to customer expectations, J.C. Penney has nothing,” said Robert Passikoff, president and founder of New York-based research firm Brand Keys Inc. Penney’s has been “going down for awhile,” he said. “They try to be all things to all people on the cheap, and that kind of thing doesn’t last. You need to give people a reason to visit. Kohl’s and Macy’s rank higher in terms of value proposition and shopping experience.”
One Seventh Avenue private label maker said Penney’s has recently been eyeing brands that have a little more edge, are meaningful but not national in scope. It’s been historically difficult for Penney’s to get major fashion brands due to competitors like Macy’s, so it’s taken the alternative route aggressively building a stable of private labels and, lately, buying brands, such as Liz Claiborne and Monet. Sources noted that Kramer was aggressive at Kellwood in buying brands. Over the past year, Kellwood acquired Adam, Rebecca Taylor, Amsterdam-based Scotch & Soda and yoga line Zobha.
Konheim supported the theory that Penney’s could pursue a higher grade of product, and suggested the retailer may be underestimating its customers. “When we don’t try to think about the demographic and sell Penney’s our best styles, their customers respond,” he said.
“Vendors are always going to want to work with Penney’s. Their terms aren’t as onerous as other retailers. For us, they’ve been a pretty good partner,” said one manufacturer source.
While improving the store experience seems to be the first order of the day, Penney’s Internet business, which at one time set the industry standard, also requires some fixing. Internet sales dropped 5.4 percent to $341 million in the third quarter, with the most noticeable weakness in home goods. The chain is preparing a significant relaunch of its e-commerce site in the first half of next year, with much greater product assortments, new forms of payment and much richer mobile capabilities, including tablets.
Also said to need some fixing: The Foundry Big & Tall Supply Co., a men’s big and tall concept aimed at taking share from market leader Casual Male Retail Group Inc., was launched by Penney’s with much fanfare in April with 10 stores and with an ambitious rollout plan for 100 stores by 2013 and triple that number within five years. However, as of today, the concept has yet to expand beyond its initial 10 stores.
Another new men’s concept at Penney’s called Clad, an e-commerce and style site, was initially seen launching in August but didn’t until Nov. 9. Clad partnered with Esquire on a mini-magazine, the Clad Report, which ran in the September issue and promoted the site. However, customers who attempted to access Cladmen.com to buy some of the products hit a screen that read: “Whoa, you’re too fast for us. Cladmen.com isn’t quite ready yet.”
Penney’s is also changing its pricing policy this spring, but has yet to publicly specify how. Pricing changes will begin to be noticed on jcp.com in February, and in the spring at Penney’s stores. It is believed that the company will go to some version of everyday low pricing and reduce coupons, while maintaining some of its big sales promotions. However, manufacturers question whether, in the current economy, trying to wean consumers off sales and coupons was a good idea. “Who but Wal-Mart has ever been successful with an everyday low price strategy?” asked one manufacturer.
Although Johnson’s track record at Apple was impressive, apparel industry executives questioned whether he can create the same magic with a store carrying thousands of stockkeeping units. “Apple basically sells three products: the iPad, the iPod, the iTouch,” he said. “Penney’s is not going to be an easy fix, but he has the unique ability to be the Macy’s alternative.”
Observers also believe that once Johnson has completed his appointments for upper management, changes could ripple through the merchant ranks.
Penney’s, said Craig Johnson, president of Customer Growth Partners, “continues to bleed market share, there’s no doubt about it. They don’t need to marginally improve it at the edges, it has to be a true transformation, possibly even a radical transformation. Right now, the store experience not only lags Macy’s, Kohl’s and Nordstrom, it’s essentially unchanged since the 1980s.”
Said Leon Nicholas, director of retail insights at Kantar Retail, “I don’t know where [Penney’s] place is in the retail grid. It’s in the big middle of retail and when you’re in the middle you can end up donating share to others who offer you either the convenience or the price or the experience.”
“The first thing to do is to solidify a new management team,” said retail consultant Walter Loeb. “The second assignment is to become more consumer centric, merchandising more on the local level. The customer in New York and Dallas may have different preferences. Most important, the assortment must be more fashion oriented. It can’t just be basics. The best idea would be look Macy’s because Macy’s is very focused on local customers, value and at the same time pressing fashion.”