J.C. Penney Continuing Ron Johnson’s Vision on the Cheap

J.C. Penney Co.’s new home department is like Technicolor Oz plunked down in black-and-white Kansas.

Dreamed up by Ron Johnson before the former Apple Inc. retail wizard was ousted as chief executive officer in April, the housewares emporium, which opens this week, features vibrant colors, wood fixtures and other modern flourishes. The rest of the century-old department-store chain? Not so much.

The dichotomy presents a challenge for CEO Myron Ullman. Johnson’s vision is too far along to abandon, yet J.C. Penney is consuming cash faster than any other U.S. brick-and-mortar retailer. So Ullman, 66, has opted for what might be described as Johnson Lite as he sets about renovating the two-thirds of store space left untouched during Johnson’s 17-month tenure.

Rather than a mini-mall of 100 branded shops, Ullman is testing scaled-down versions of the concept, including one selling Haggar and Dockers khakis that looks nothing like Johnson’s proposed Khaki Bar. If it works, Ullman will do the same with additional national and house brands.

As he renovates the stores, Ullman must appeal to the younger shoppers Johnson was chasing and the chain’s older, more conservative customers, said Paul Swinand, an analyst for Morningstar Inc. in Chicago.

The contrast between old and new may be “jarring” for some of them, he said. “It’s an issue they have to address.”

Ullman, who ran the chain from 2004 to 2011, initially focused on shoring up J.C. Penney’s finances after returning. He borrowed $850 million from the company’s credit line and secured a loan of $2.25 billion from Goldman Sachs Group Inc.

Trading Discount

That helped boost the Plano, Texas-based chain’s shares, which have gained 12 percent since Ullman’s return. Still, they trade at a 73 percent discount to the Standard & Poor’s 500 Retailing Index on a price-to-sales basis, according to data compiled by Bloomberg. The shares rose 1.1 percent to $17.96 at the close in New York.

Now Ullman is trying to win back customers who decamped in droves after Johnson axed most discounts for an everyday low pricing model. Deals are back and feature prominently in advertising, which under Johnson sought to persuade shoppers that J.C. Penney was drop-dead cool. Ullman even greenlighted an ad that acknowledged mistakes and pleaded for customers to return.

Reversing the chain’s fortunes -- J.C. Penney’s net loss widened in the first quarter to $348 million and sales sank 16 percent -- means getting the stores and assortment right.

Johnson originally planned to install 100 of his shops by the end of 2015 in what he called a specialty department store. Only a handful were completed in about 700 of the largest locations before he left. Even if he had stayed, the company lacks the funds to continue beyond the housewares department.

Cash Burn

Once that’s done, less than 10 percent of this year’s budget for capital expenditures will remain, the company has said. Meanwhile, J.C. Penney’s operations consumed $752 million in cash in the quarter ended May 4, more than any other U.S. brick-and-mortar retailer, according to data compiled by Bloomberg.

With money tight, Ullman is also ditching Johnson’s plans for coffee bars and food stands dotted throughout the stores. Ditto for the “street” that was to lead shoppers to a town “square,” home to such activities as yoga and pilates.

Johnson’s original Khaki Bar featured long wooden tables equipped with iPads loaded with sizing and style apps. The scaled-down version is right out of the department store 101 manual: neatly folded clothes on wooden shelves and tables, track lighting, posters of hunky-looking guys, more mannequins and bolder signs for the Haggar and Dockers brands. Some version of the concept will be expanded to more than 500 stores by October, said Daphne Avila, a company spokeswoman.

Never Implemented

While Haggar and Dockers had shops designed and prototypes built, they were never implemented. The scaled-down versions represent an evolution, not a departure, said Rich Honiball, senior vice president for marketing, licensing and e-commerce for Dallas-based Haggar.

“At no point was it that we weren’t going to do this,” Honiball said in an interview. “That commitment has continued through Ullman.”

Under Johnson, some of J.C. Penney’s most popular house brands disappeared or were minimized because they lacked the hip factor. Now, to win back customers, the company is reviving four private-label brands in time for the back-to-school shopping season that kicks off next month. The return of St. John’s Bay was in the works before Johnson left. When paired with the men’s side of the brand, St. John’s Bay had generated more than $1 billion in annual revenue, Avila said.

Older Shoppers

The company is also bringing back three other brands popular with older, female shoppers: Ambrielle, a lingerie line, outdoor-apparel Made For Life and JCP Home. They’ll be promoted heavily, helping to underscore the chain’s return to its original value positioning.

“Private brands have been under-emphasized over the past year,” Deborah Weinswig, an analyst with Citigroup Inc., wrote in a note to clients on May 17. “J.C. Penney is focused on getting back into this business, which should resonate well with core customers.”

The question is what core customers will make of the new home section as it rolls out at 500 locations in the coming weeks. Besides distressed flooring that screams Restoration Hardware, the department features $60 Michael Graves toasters, Martha Stewart cupcake liners and demonstration kitchens.

Even if shoppers respond favorably to the renovations and new products, there’s no hiding the fact that the rest of the store will look dated by comparison.

“You just can’t neglect the old parts of the store,” Swinand says. One of the themes Ullman has been focusing on since he came back is that the company “can’t flush the rest of the store down the toilet.”

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