Ron Johnson planned to roll out a shop-in-shop format

Ron Johnson planned to roll out a shop-in-shop format

Ron Johnson, the man hired just 18 months ago to transform US retailer JC Penney, has been unceremoniously ousted after his radical revamp plans failed to gain traction.

After joining the company in November 2011 from Apple, where he was head of retail, Johnson revealed his strategy for the department store chain - a strategy called "In Praise of Fresh Air" - in late January 2012.

The four-year plan would see JC Penney change its pricing and promotional strategy along with the shopping experience it offered customers.

The new pricing strategy involved moving to an everyday low pricing model, accompanied by two types of promotion: "month-long values" and "best prices", ticketed on the first and third Fridays of each month.

The second cornerstone of the strategy was to take the shop-in-shop concept to an extreme level, merchandising the entire store in a series of 80 to 100 brand shops in an initiative dubbed "Main Street".

Not only did this involve new names and partnerships with high-profile designers, such as Nanette Lepore's teen girls' fashion line L'Amour Nanette Lepore, but also revamped looks for existing brands such as Izod, Liz Claiborne and The Original Arizona Jean Company.

The core of the store would become the "Town Square", a haven of entertainment and various attractions, including hot dogs and ice cream in the summer.

As part of these plans, Johnson also announced US$900m in cost savings by the end of 2014. These savings were to mostly come from stores, advertising and head office operations.

Fresh air begins to get stale
But just two months after announcing its new strategy to turnaround the stores and merchandise, the company admitted there was a risk it might not work and that it could hit sales for some time.

"We face uncertainties in connection with the implementation of our strategies to transform our business," the company said at the end of March last year, adding that there is "no assurance that we will be able to successfully implement these strategic initiatives, which may result in an adverse impact on our business and financial results."

Unfortunately the company's worst fears were realised, with losses widening to US$985m in the year ended 29 January, from a loss of $152m in the year before.
In response, one of the cornerstones of Johnson's "In Praise of Fresh Air" plan was knocked out, with the company returning to a promotional strategy.

Explaining the decision to analysts, Johnson said: "Experience is making mistakes and learning from them, and I've learned a lot."

He continued: "We learned she prefers a sale. At times she loves a coupon and always, she needs a reference price. Whether there's a manufacturer suggested price on a branded item, a comparison on a private label item or a sale, she needs to feel she added value to her family through the saving she got from being a savvy shopper.

"So we have brought back sales. We have brought back coupons for our rewards members, although we still call them gifts and we'll offer sales each and every week as we move forward."

Yet for investors, who had seen their shares lose 50% of their value over the course of his tenure, this education was coming at too high a price.

Everything old is new again?
The replacement of Johnson with former CEO Mike Ullman will raise many questions among JC Penney's investors and suppliers.

In the release announcing his appointment, Ullman said he intends to work with the company's leadership and board to develop and "clearly articulate a game plan to establish a foundation for future success."

What that means at this stage is anyone's guess and industry watchers will have to wait and see if Ullman has the appetite to finish off what Johnson began.

What is certain is that all of the problems the retailer had 17 months ago are still there, but now with the added challenge of a weaker balance sheet, and significantly less free cash flow to fund any new plans.

Meanwhile, Bank of America Merrill Lynch analyst Mark Wallis said today (9 April) that in his first tenure as CEO, "Ullman struggled to elevate the assortment and improve financial metrics coming out of the recession".

He added that while it was clear that Johnson had to be replaced, "we think someone who could take a fresh look at the company and strategy, such as an outsider, would have been a better choice".

Wallis said that Ullman's successes may provide an insight into the company's next steps. "Ullman brings a deep understanding of JC Penney's core customer and what motivates her to shop. He was successful in bringing Sephora and MNG by Mango to JC Penney during his first tenure as CEO.

"We expect Ullman to continue to try to elevate the assortment to target a more affluent customer. We also expect the resumption of a more promotional cadence versus Johnson's everyday low price strategy, and more recently weekly promotional cadence."

Some believe that the best possible outcome for the retailer would be for it to go private. Reports are already indicating that private equity firms like Apollo Global Management and Leonard Green & Partners are studying a potential buyout of the chain.

Yet others believe the brand is in terminal decline, and that turning around a retailer that has aged into obsolescence is an impossible task.

And, according to one report, if the company runs through cash at the rate it has over the past 12 months, it will have no money on the balance sheet by sometime this summer. Furthermore, if Ullman can't stop the bleeding, JC Penney will be bankrupt by Labour Day (2 September).

Whatever Ullman plans to do, investors will be hoping he moves quickly.