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April 9, 2013

JC Penney ousts CEO, looks to secure its future

NEW YORK (AP) — J.C. Penney is hoping its former CEO can revive the retailer after a risky turnaround strategy backfired and led to massive losses and steep sales declines.

The company's board of directors ousted CEO Ron Johnson after only 17 months on the job. The department store chain said late Monday, in a statement, that it has rehired Johnson's predecessor, Mike Ullman, 66. Ullman was CEO of the department store chain for seven years until November 2011.

The announcement came after a growing chorus of critics including a former Penney CEO, Allen Questrom, called for Johnson's resignation as they lost faith in an aggressive overhaul that included getting rid of most discounts in favor of everyday low prices and bringing in new brands.

The biggest blow came Friday from Ullman's strongest supporter, activist investor and board member Bill Ackman. Ackman had pushed the board in the summer of 2011 to hire Johnson to shake up the dowdy image of the retailer. Ackman, whose company Pershing Square Capital Management is Penney's biggest shareholder, reportedly told investors that Penney's execution "has been something very close to a disaster."

On Saturday, Ullman received a phone call from Penney Chairman Thomas Engibous asking him to take back his old job, according to Penney spokeswoman Kate Coultas. The board met Monday and decided to fire Johnson.

The early investor reaction to the shake-up was negative. J.C. Penney shares tumbled $1.39, or 8.8 percent, to $14.48 in trading about two hours before the market opening on Tuesday.

Until early last week, some analysts thought the board would give Johnson, a former Apple Inc. and Target Corp. executive, until later this year to reverse the sales slide. A key element of Johnson's strategy was opening "mini-shops" in Penney stores featuring hot brands to help turn around the business. They began opening last year and had been faring better than the rest of the store.

"I truly believed that he had until holiday 2013," said Brian Sozzi, CEO and chief equities strategist at Belus Capital Advisers. "Today's announcement is an indictment of his strategy."

Under Ullman, the chain brought in some new brands such as beauty company Sephora and exclusive names like MNG by Mango, a European clothing brand. But he didn't do much to transform the store's stodgy image or to attract new customers. He's expected to serve mostly as a stabilizing force, not someone who will make changes that will completely turn the company around.

"What they need is a little bit of stability and essentially adult supervision," said Craig Johnson, president of Customer Growth Partners, a retail consultancy. "(Ullman) did nip-and-tuck surgery. But this was a place that needed radical surgery."

Sozzi said he thinks that Ullman will serve only as an interim CEO. He expects the Plano, Texas, company's board to hand off the job to another executive who may want to take the company private.

Johnson's removal marks a dramatic fall for the executive who came to Penney with much fanfare. There were lofty expectations for the man who made Apple's stores cool places to shop, and before that, pioneered Target's successful "cheap chic" strategy by bringing in products by people such as home furnishings designer Michael Graves at discount-store prices.

Few questioned Johnson's savvy when Penney hired him away from his job as Apple's retail chief in June 2011 to fix a chain that had gained a reputation for boring stores and merchandise.

But Johnson's strategy led to sputtering sales and spiraling losses. The initial honeymoon with Wall Street ended soon after customers didn't respond favorably to his changes. Johnson revised his strategy several times in an attempt to bring back shoppers, with little success.

The turnaround plan was closely watched by industry observers who wanted to see if Johnson could actually change shoppers' behavior. The plan failed. And now worries are mounting about the company's future.

Johnson's future at Penney became uncertain after the department store retailer reported dismal fourth-quarter results in late February that capped the first full year of a transformation plan gone wrong. Penney amassed nearly a billion dollars in losses and its revenue tumbled almost 25 percent from the previous year to $12.98 billion.

Under Johnson, 54, Penney ditched coupons and most of its sales events in favor of everyday low prices. It's bringing in hipper designer brands such as Betsey Johnson and updating stores by installing specialty shops devoted to brands such as Levi's to replace rows of clothing racks.

Johnson's goal was to reinvent Penney's business into a trendy place to shop in a bid to attract younger, wealthier shoppers. The plan turned off shoppers who were used to heavy discounting. Once-loyal customers have strayed from the 1,100-store chain. It hasn't been able to attract new shoppers to replace them.

Initially, Wall Street supported Johnson's ideas. In a vote of confidence, investors drove Penney's stock up 24 percent to $43 after Johnson announced his vision in late January 2012. But as the plans unraveled, Penney's stock lost more than 60 percent of its value. Credit rating agencies downgraded the company deeper into junk status. On Monday, the stock closed down about 50 percent from when Johnson took the helm.

 

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