J.C. Penney Co. Inc. has found its “number-one warrior.”
That’s how Myron “Mike” Ullman 3rd, chief executive officer of Penney’s, described the hiring of president and ceo-designee Marvin Ellison, in an interview Monday. The 49-year-old executive vice president of U.S. stores at Home Depot will join Penney’s Nov. 1 and will succeed Ullman as ceo on Aug. 1, at which time Ullman will begin a one-year term as executive chairman. Ellison also will have a seat on Penney’s board.
“The board was highly engaged, and from the beginning it was very important to get the turnaround well under way before we chose the next leadership,” said Ullman, 67. “We were all very impressed with Marvin’s passion for the customer, his relationships he’s had with the associates he’s worked with over his 30-year career and his energy for the opportunity that he sees to get into the minds of the customer in such a way that we become the preferred choice for that customer.”
Ellison faces the daunting task of continuing Penney’s turnaround efforts. While the Plano, Tex.-based retailer has been showing signs of life, the question is whether Ellison will be able to drive sales growth and return the company to profitability. Penney’s reporting structure isn’t expected to change until Ellison transitions into the ceo role.
Wall Street on Monday seemed to take a wait-and-see approach to Ellison’s appointment. Penney’s shares closed down 3 cents, or 0.4 percent, to close at $7.09 in New York Stock Exchange trading, well off their morning high of $7.50.
Ullman said the board had a pretty easy decision once they met Ellison. The search, conducted by Heidrick & Struggles, has been going on for some time, but heated up in the last four to six weeks.
A 12-year veteran of Home Depot, Ellison has been the senior-most operations leader for the home improvement retailer’s almost 2,000 U.S. stores. He plans to relocate with his family from Atlanta to Dallas.
“What an iconic company. I grew up my entire life understanding J.C. Penney. I grew up in a small town in western Tennessee and we had a Penney’s about 15 to 20 miles from my house,” said Ellison. “I’ve known about it my whole life and always respected the brand and what the brand served in Middle America. But more importantly, I’ve been so impressed with the last 18 months, and the turnaround that Mike and his leadership have taken on.”
Ellison acknowledged “the resiliency of the team and the company coming back from strategies that didn’t resonate with the customers,” adding he expects Penney’s will be “one of the great turnaround stories in retail, and that turnaround is already under way.”
The road ahead remains a long one, as Penney’s continues to dig itself out of the hole created by former ceo Ron Johnson in his disastrous effort to reinvent the middle-market department store. The retailer is still losing money, but in the three months ended Aug. 2, the chain cut its net loss to $172 million, from the $586 million loss recorded in the second quarter of 2013. Penney’s slightly exceeded revenue expectations with sales improving 5.1 percent to $2.8 billion from $2.66 billion a year ago, compared with the $2.79 billion in sales expected.
Last week, Penney’s revised its third-quarter sales guidance to reflect softer selling than expected during September due to lower levels of clearance compared with last year and the continued difficult retail environment. The retailer expects comparable-store sales for the third quarter of 2014 to be in the low-single-digit range, compared with its original guidance of midsingle-digit growth. For fiscal 2014, Penney’s guidance stays unchanged at midsingle-digit comparable-store sales growth and positive free cash flow, suggesting a fourth quarter that should be better than the third quarter.
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Before assuming his current role at Home Depot in 2008, Ellison was president of the Northern Division of Home Depot, where he was responsible for the sales and operations of more than 700 stores in 21 Midwest and Northeastern states and led a team of more than 150,000 associates. He has also been senior vice president of global logistics for Home Depot, and vice president of loss prevention. Prior to joining The Home Depot, Ellison spent 15 years at Target Corp., in various roles, including corporate director of asset protection.
Was a strong operations, supply chain and logistics background — rather than merchandising experience — something the board felt was most needed at Penney’s?
“Anybody that operates at the level Marvin has been operating in, in terms of a very senior leadership team in a multibillion retailer, has all the skills necessary or he wouldn’t be in that assignment,” said Ullman. “Some of the experiences they may have in their past vary. I used to be the director general at LVMH [Moët Hennessy Louis Vuitton], which is a luxury goods company.…It’s very different from what I’m doing now.”
Ullman said it came down to Ellison’s character and retail experience.
“I think it’s a leadership job, having the right character, the right ability to inspire the team and an understanding of the customer, and all the technical pieces. The thing we liked about Marvin is he had a very strong retail orientation, a real understanding for the customer and a real passion to be leading a team of associates, particularly the warrior spirit.…I introduced him this morning, as ‘Here’s our number-one warrior,’” added Ullman.
Once Ullman moves up to executive chairman, he plans to remain involved in the company. “Obviously the executive chairman is primarily responsible to the board and [for] being the liaison between the board and the management team.…I will be, more or less, as helpful as I can be to Marvin and the team,” said Ullman.
Since Ellison doesn’t start until Nov. 1, he said he wasn’t ready to discuss what he felt were the company’s biggest opportunities and challenges.
“To be honest, this is not my first official day. That’s Nov. 1, and it’s a holiday today,” said Ellison, referring to Columbus Day. “What I will say, I’m looking forward to coming in and working with Mike in a true transition process. There’s a lot to learn. The thing that my experience gives me is the worst mistake a leader can make is coming in with preconceived notions, or coming in with a ready-made playbook for a new business. I’m looking forward to coming in and spending a lot of time with the customers, with suppliers, with our associates, understanding and embracing their warrior spirit, and just spending time with Mike and the executive team to have a better answer to the question in the near future.
“My wife is in town today, looking at properties, and she is hot on the trail to find a nice home for us to move. We’ll be moving probably the first of the year, but I’ll be starting in November,” he added.
Industry observers expressed some skepticism over Ellison’s appointment. One knowledgeable source said even though he’s very good as an operations person, he’s not a merchant. “That’s a crying need for that company,” the source said, adding Ellison won’t become ceo for almost a year. “In many ways, it’s a nonevent. He may be a terrific operations guy and a great leader, but I don’t know if he’s particularly relevant. They need something more dramatic to fix it. It’s questionable whether it’s fixable.”
Although Ellison admitted he’s had “no direct experience” in merchandising, he feels he’s up for the challenge. “The thing that I’ve learned about retail is that very few decisions are made in a vacuum. It’s very collaborative. Although you don’t have direct decision making, you have input, and you’re sitting in rooms while decisions are made and you’re watching and understanding the process. And I walked away from Target with a broad understanding of retail because I had a chance to play a role in a lot of different process development,” said Ellison.
He is personally familiar with the changes that have occurred at Penney’s, having been a frequent shopper at its stores in Atlanta. “I am a shopper, and if you were here in person, you’d see me decked out in J.C. Penney attire. I purchase my home improvement goods from Home Depot and I shop at J.C. Penney. Candidly, I’ve been a customer, and my wife is also,” he said.
Ellison’s ascension to ceo next year will bring to a conclusion Ullman’s second tour of duty as Penney’s ceo. The former chairman and ceo of R.H. Macy & Co. and president of the selective retail group of LVMH joined Penney’s as chairman and ceo in 2004 before relinquishing the ceo role to Johnson and retiring from full-time service in late 2011. He stepped back into the ceo role in April 2013 after Johnson’s attempts to reinvent the midtier retailer resulted in dramatic losses and sales erosion.
As Johnson implemented brand-centric shops-in-shop and eliminated or downsized Penney’s roster of proprietary brands, sales in 2012 fell nearly 25 percent, to $12.99 billion from $17.26 billion the prior year, and comparable-store sales slid 25.2 percent. The net result was losses totaling $985 million, up from a loss of $152 million the prior year, and a decline in sales per gross square foot to $116 from $154 in 2011.
Stepping back into the fray in 2013, Ullman reinstituted many of the brands Penney’s customers knew best, moved to close unprofitable stores and to shore up the retailer’s balance sheet. Although losses continued last year — the net loss for 2013 was $1.39 billion — Penney’s registered an uptick in same-store sales of 2 percent in last year’s final quarter, when holiday season sales rose 3.1 percent.
Ullman said he believes it comes down to private brands, national brands, exclusives in the stores, customer service, and the omnichannel experience. “Those five things are the price of admission to compete in the midtier. That’s what the turnaround was about, that’s why we’re almost through the turnaround. The same active customers are now with us that were in 2011. We feel we’re mostly through the turnaround,” said Ullman.
Speaking at an investor meeting in New York last week, Ullman defined the three large incremental opportunities (Center Core, Home and Omnichannel) which would take Penney’s to a whole different place. “Obviously, the market’s very volatile right now in reacting to everything we say and do on a very short-term basis.” He said the purpose of the Oct. 8 meeting was “to take a long-term view that we felt that we owed ourselves, the customer and our investors, a $1.2 billion attainment of EBITDA in 2017, which would be back to the health of the company three or four years ago,” he said.
Penney’s predicted over the next three years a $3.5 billion sales opportunity, including a $1 billion growth opportunity in center core, a $750 million opportunity in home and an $800 million opportunity in omnichannel growth. Of that amount, the company conservatively expects to realize about $2 billion in incremental sales over the next three years, resulting in midsingle-digit sales growth during that period.
Ullman said the Center Core is deficient in some respects. While he said Sephora and fine jewelry were doing well, other categories such as women’s shoes, handbags, women’s accessories, sunglasses and intimate apparel are in need of improvement. He also noted that Penney’s “used to be terrific in home,” in terms of penetration, and it had been 20 percent of the business. Now it’s about 10 percent. “We need to earn back customers we lost from home, by what we did with the concept in the previous strategy.” Penney’s home business increased 30 percent in the spring, and he expects it to be up “double digits” going forward. (Incidentally, he said, The Home Depot has several businesses that Penney’s overlaps with, such as window coverings, towels and a bedding program in one of the Home Depot catalogues.) Ullman noted that Penney’s home business is a bigger percentage of its Internet business. “That’s where we lost a lot of business, too. Frankly, there were things done with the online business that were not helpful to its growth. We have a big growth opportunity in Internet, particularly in home.”
Ellison concurred that Penney’s omnichannel strategy should be a key initiative, especially since one of its best attributes is private label. “The greatest challenge for a brick-and-mortar retailer versus an online competitor is price comparisons. When you can have a high penetration of private-label product, it puts you in a unique position where you’re not going to be ‘showroomed’ so to speak, by going against a pure online player,” he said. “Penney’s is very well-positioned to build on that private label to create that seamless transition between online, mobile and in-store. The strategy I’ve had a chance to look at is well-thought-through and there’s tons of upside, and it will be a big growth initiative for the company for the forseeable future.”
The executives will be joined at the hip for awhile. “With the board we agreed the first work was to stabilize the business and get the turnaround initiatives substantially complete. We won’t be satisfied until we start to generate bottom-line profit, obviously,” said Ullman. “We have a transition period here that works well for everyone. Marvin and I will be closely aligned on all aspects of running the business because that doesn’t stop while you’re doing an orientation. We’ll have a chance to see a lot of things together, and he’s a quick study and his background and references talk specifically about his intensity and his orientation to high performance.”
Ullman said there are no immediate plans to close any of Penney’s 1,100 stores. Over the last 18 months the retailer has made a lot of changes to get the right management team in place. “The team of 20 people or so, I feel very satisfied, and I think Marvin deserves a chance to work with all 20 of us, and he’ll have his own points of view over time,” he said.
Analysts reacted favorably to the news of Ellison’s hire, but one analyst said the plans outlined last week might be overly ambitious. Robert Drbul, analyst at Nomura Securities, said the forecasted growth outlined last week during analyst day “could prove somewhat aggressive and [we] continue to expect that the company’s market-share losses in 2012-13 could be difficult to recover in the very sticky retail environment. Our checks would suggest that Mr. Ellison’s well-respected reputation on Wall Street and track record of success will benefit the retailer.” Drbul said he continues to remain “cautious on J.C. Penney’s weak balance sheet and financial position.”
Sterne Agee analyst Chuck Grom thought Ellison’s hire was a positive one. “JCP’s announcement of a new ceo hire this morning is a bright spot for the company. To this end, while Mike Ullman has done a respectable job stabilizing JCP, it’s become readily apparent that a new vision is necessary to transform the company and fix its largest problem — deteriorating traffic.”
Walter Loeb, a retail consultant, noted, “Ellison has strong operational skills and leadership qualities. But he will have to strengthen his merchandising division and have a vision for the future.”
According to Mark Altschwager, an analyst of Baird Equity Research, “The hiring of a credible retail executive (nearly 30 years at Home Depot and Target) alleviates succession-planning concerns that had been an overhang for the stock. That said, we continue to view risk-reward as balanced given higher investor expectations for further market-share gains, normalizing comparisons and macro-headwinds that continue to hinder traffic and midtier consumer spending.”