Byline: David Moin

NEW YORK — It’s a tough road ahead. Even though he’s confronted with cluttered stores, a slow-moving Plano, Tex.-based bureaucracy and nimble competitors that have swiped market share, Allen Questrom predicts J.C. Penney could show real signs of progress after he’s been on the job for a year.
“We need a strategic review,” Questrom said during an interview Thursday, when WWD reported exclusively that he was expected to be named Penney’s chairman and chief executive. The store confirmed the appointment Thursday morning.
“Will it be revolutionary? I don’t think so,” Questrom said. “It will be an evolvement to something more contemporary and recognizing today’s different competitors. Penney’s has a great 98-year history. But customers don’t care about that. What they care about is whether Penney differentiates against competitors.”
The company must “act as one, with all its people focused on satisfying customers.”
What’s his vision for the foundering chain? A contemporary experience both in stores and products, catering to a broad middle class of young people with possibly more brands and a larger private label business [it’s already 30 percent of volume] and an e.commerce operation that fully takes advantage of Penney’s strong catalog operation.
Questrom, whose got a history of mending troubled companies, is set to join the $33 billion Penney’s, the nation’s fourth-largest chain, on Sept. 15, succeeding James Oesterreicher. But even before getting his feet wet, a turnaround of sorts — the kind that shareholders really like — has begun. Penney’s shares rose 16 percent to 17 1/4, up 2 3/4 on the New York Stock Exchange Thursday.
That was quite a change for a chain that has suffered from sinking stock value (it was once as high as $75) and sinking market share for years. It was just those reasons that forced Penney’s over the past year to bring outsiders into heretofore a very insulated organization, culminating in the Questrom appointment.
“This is a huge coup for Penney’s,” said Hal Reiter, ceo of the Herbert Mines executive search firm. “He’s the first true outsider with full P&L experience to come into the company.”
His move to Penney’s, leaves a big hole at Barneys New York, where he is currently chairman, ceo and president.
David Strumwasser, principal of Whippoorwill Associates, an investment fund that owns a majority of Barneys along with Bay Harbour Management, said there was a list of about to 20 to 30 people who would be considered. He would not disclose any candidates, but there was no shortage of speculation. Retail experts cited several executives from luxury stores that would likely be contacted in a search, including Joseph Gromek, ceo of Brooks Brothers; Robert Tarr, former chairman of Neiman Marcus Group; Ron Frasch, ceo of Bergdorf Goodman, though he just joined Bergdorf’s in the spring; Rose Marie Bravo, though she seems entrenched in her job at Burberry and is leading that brand’s turnaround; Wayne Meichner, an executive vice president at Saks Fifth Avenue with broad merchandise responsibilities.
There was also speculation about Peter Rizzo, president of Bergdorf’s, and Thomas Shull, a former Barneys ceo and current ceo of, but they are not believed to be in the running. Rizzo, among the strongest merchants in the luxury field, is not considered as strong in administration and people’s skills, and Shull was replaced at Barneys by Questrom, despite reportedly wanting to stay on there.
Questrom, who has been with Barneys since May 1999, and even longer as a board member, breezed through a 20-minute conference call with retail analysts Thursday, marked as much by kudos and congratulations, as substantive commentary on his plans for Penney’s. Before Barneys, Questrom was chairman and ceo of Federated Department Stores, Neiman Marcus, as well as Rich’s and the former Bullock’s chain.
He said he will continue as chairman of the Barneys board, but not as “an operating chairman” in any way involved in running the company. His participation will be limited to the four regularly scheduled board meetings.
While news that Questrom was joining Penney’s stunned the industry, his departure from Barneys was not so surprising. It was a small assignment by Questrom’s standards. “Penney’s is a wonderful challenge,” Questrom said during the interview. “In the case of Barneys, we accomplished most of the things we set out to do. This will be the first year that Barneys will be in the black. People working at the store feel better.”
He said it wasn’t difficult to get out of his commitment to Barneys, which was a three-year contract without a salary, entitling him to 15 percent of Barneys stock, vested over the three years. This week, he informed Barneys management and owners that he was leaving. “They were extremely easy to work for and very supportive,” Questrom said. “They’ve got a big job, but they recognized [Penney’s] is a much bigger opportunity.”
The slim and fit Questrom, who at 60 looks 10 years younger, said he signed a five-year contract with Penney’s. The normal retirement age at Penney’s is 60.
“There are a lot of opportunities here, including building on many things they’ve started to do,” he said. He suggested that the company has started getting “more focused assortments,” so there’s a consistency in quality across categories, “upgrading store environments so they’re more contemporized, and returning to good, basic fundamentals.”
“Most companies that are big go off course in time.”
Asked what the essential issues are for Penney’s, a chain squeezed for market share by discounters such as Wal-Mart and Target and stronger department stores such as Federated — where he worked for three decades — and May Co., Questrom replied: “Absolutely, we need to have more productive stores and greater comp-store sales growth. The business is all about assortments. Differences will be told over the next year.
“We will make the stores contemporary so they appeal to the broad middle class of young people, and I don’t mean 15-year-olds.
“Our stores have to be focused on how to differentiate. They have a long history of private label, brands, fashion quality and value. Penney’s represents the largest single department store chain in the country. There’s enormous advantages in national advertising, a wonderful mail-order business enabling us to take advantage of the whole dot-com business. Penney’s probably has the largest e-tailing business. It’s the product of a well-established, mature catalog business. There are huge dot-com and mail order opportunities.”
Penney’s problems are in part due to inability to secure major brands. But Questrom downplayed any desperate need for brands, saying, “I’m not sure we must have the same brands,” as department stores. “We don’t have to have three stores in the same mall carrying all these same brands.”
He described the brand issue as “not as complicated as it seems. We can carve out some brands unique to us. However, that doesn’t mean we won’t take some of the brands,” that other department stores carry.
It can get ugly, when Penney’s does land a big department store brand. When Warnaco started selling Penney’s its Calvin Klein underwear brand last December, war broke out between the designer and Warnaco’s chief Linda Wachner, with Klein screaming that Wachner was damaging the brand. To be sure, Penney’s wasn’t Klein’s only problem. In fact, he sued Wachner over the sale of his jeans to Costco and other discounters. Still, some department stores reacted sharply to the Penney’s move. Dillards dropped the underwear brand and May Co. cut its orders.
So while Questrom does have strong ties to the vendor community, his joining Penney’s doesn’t automatically mean brands will flock to the chain. “I don’t think it’s about knowing people,” said one department store executive who knows Questrom. “He’s never been the person in the market. I don’t think that even with Questrom, upscale brands will sell Penney’s because if they do, department stores will threaten to drop them.”
Questrom’s second in command, the highly regarded Vanessa Castagna, chief operating officer and executive vice president over stores, merchandising, catalog and e-commerce, is expected to be closer to the apparel market.
At one time, she was a candidate for ceo at Penney’s. Questrom said that he “assumed” she would stay on. “She’s very well thought of, but I don’t know her that well.” He also said that Castagna’s role will not change. “She has great enthusiasm, great vigor, she has the potential for the future.” Castagna, who is 50, could one day succeed Questrom at Penney’s.
When a new ceo comes in, changes in the ranks follow, Questrom acknowledged, but he added, “Historically, I have not done wholesale changes in management.”
During his conference call with analysts, Questrom, who started his retail career in 1965 as an executive trainee at Abraham & Straus, said “It will take me some time to get up to speed before developing a strategy to strengthen the Penney’s brand. I’ll spend several months working in the field and working with the people to understand the issues. The positives are fairly obvious. Penney’s has a great mail order business, a great dot-com business and the combined pieces are part of the future.”
“My focus will be to make sure we have a strategy and make sure everything focuses on that.”
Asked if charges and store closings are in the cards, Questrom told analysts: “I don’t have an answer for that,” adding that it will be determined after an analysis.
As for his former company, Questrom said Penney’s strengths over Federated are “strong mail order and strong dot-com. Without a real strong catalog, it’s difficult to maximize and take advantage of dot-com.”
He also stressed the further development of private labels. “I’ve always had great admiration for Arizona and Worthington, and those are to be continued.”
“Change in a big company is not on the day I start,” he said. “It’s a process of evolution, but certain strategies can be enunciated early. After a year, we’ll start to see some progress, but I don’t want to make any promises. It’s getting people to focus on two or three issues that are crucial to the company.”
“Mr. Questrom brings to J.C. Penney a strong background in merchandising and managerial skills, which had been lacking for a long time at Penney,” said Jeff Edelman, PaineWebber, in a research note. “We believe his appointment is very compatible with the current merchandising initiatives under the direction of Vanessa Castagna, who is also thought to be a very important part of our anticipated turnaround for Penney. If the turnaround is successful, this keeps the opportunity open for Castagna to eventually assume the ceo role.”
“In our view, this is a great opportunity for Penney to ‘clean the slate.’ We believe the initial emphasis will be a ridding of all of Penney’s excess baggage and noncore businesses, including the ailing drug store chain and direct marketing division. There will likely be some additional housecleaning in terms of personnel.”
Edelman reduced his third-quarter estimate by 4 cents to 36 cents and reduced the fourth-quarter estimate by 7cents to 62 cents, putting the new 2000 estimate at $1.30 versus $1.41, previously.
“However, we believe near-term earnings are meaningless at this point. More importantly, we have been a believer that J.C. Penney was on the right track and today’s event reinforces that thesis. As such, we are upgrading our rating on J.C. Penney to “buy” from “attractive” based on this news, and are subsequently raising our 12-month price target from $20 to $25, which assumes a P/E multiple of 15 times our new 2001 estimate.”
Elliot Cole, senior partner in the law firm Patton Boggs who sits on the board of Boston University with Questrom, said, “Allen is the most focused guy I have ever met. He doesn’t suffer fools and doesn’t waste time. No matter where he was and what the brand is, Questrom understands it quickly. The world is talking about branding, whether it’s Neiman’s or Macy’s. Questrom is very malleable into whatever brand it is his job to serve. Questrom fits into Polo [where he sits on the board] as well as Penney’s.”
“Allen built a solid foundation for Barneys and has given the store a lot of momentum,” said Strumwasser of Whippoorwill. “This was a point in time that Allen could leave and not be concerned. It’s not premature. He’s comfortable and we are comfortable. Our mission — and Allen will lead the process — is to find a successor that has the same kind of qualities he has, to keep the momentum going.”
According to its owners, Barneys is currently operating in the red on a net- income basis, but not a cash-flow basis. Its EBITDA performance improved from a loss of $26.4 million in fiscal 1996 to positive EBITDA of $25.4 million in 1999. That’s largely due to cost-cutting and sales gains, but Douglas Teitelbaum, of Bay Harbour, said, “There’s been a fairly limited amount of cost-cutting. Sales are up on a lower inventory base.”
The owners also acknowledged Barneys would consider hiring a ceo and a president. “Allen is unique in that he has both merchandising and operating expertise,” said Strumwasser. “There was no need for a number two per se. The same thing will apply to the search process. We may end up with just one person.
“The most important thing to get right is the chemistry. It’s got to be someone who can fit in.”

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