At the heart of Ron Johnson's plan to turn J.C. Penney into a mini-mall of boutiques was the notion that the department-store model needed reinvention.
Yet while J.C. Penney faced challenges on Johnson's arrival — not least that its middle-income customers had been hit hard by the economic downturn — other department stores have been thriving without a radical course correction. Exhibit A: Macy's, which has turned in 12 consecutive quarters of sales growth and managed to remain relevant in an age when many brick- and-mortar retailers have lost ground to the Web.
Myron llman, who replaced Johnson on Monday as chief executive officer, turned J.C. Penney around in his first stint running the chain, only to stumble once the U.S. slipped into recession in 2008. Ullman or his successor will have to decide what parts of Johnson's strategy can be salvaged. Ditching it altogether would be costly. Too, some of the brands Johnson introduced were starting to generate buzz and sales.
"Some of the stuff he's done isn't bad, but he was bankrupting the company," said Margaret Gilliam, founder of an eponymous consulting firm in New York. The shops dedicated to home goods and the apparel line Joe Fresh "bring a vibrancy to the store that is exciting."
J.C. Penney shares closed Tuesday at a 63 percent discount to Macy's on a price-to-sales basis. That's the widest discount in the past five years, during which J.C. Penney traded at an average 2.4 percent premium to Macy's on that basis.
The chain's operations consumed $10 million in cash in the year ended Feb. 2, the first year they've done so since at least 1987, according to data compiled by Bloomberg. J.C. Penney produced $820 million in cash from operations the previous year.
Ullman declined to be interviewed for this story, spokeswoman Daphne Avila said in an email. The new CEO, also named to the board, was first asked about replacing Johnson by Chairman Thomas Engibous last weekend. That and the fact he doesn't have a formal contract with the company has raised doubts about how long he'll be there.
"Ullman makes sense in the interim" because he knows the company's operations and that will help given the urgent cash situation, Michael Binetti, an analyst for UBS AG in New York, wrote in a note to clients. "J.C. Penney does not have the luxury of time to bring in a fresh CEO that could take some time to learn the operations and develop a strategy."
The Plano, Texas-based chain reported a net loss of $985 million last year as sales sank by 25 percent to $13 billion, the lowest since at least 1987. Meanwhile the company has delayed payments to vendors, Binetti said. The shares fell 12 percent to $13.93 in New York yesterday.
At root, Johnson's vision for J.C. Penney differed little from what other department stores have been doing for some time: carrying exclusive merchandise that consumers can't find anywhere else.
Consider the legal battle between Macy's and J.C. Penney over the right to sell Martha Stewart-branded merchandise. Both companies want to use Stewart's name to lure customers into their stores. Johnson won kudos from analysts for choosing a range of cutting-edge brands, including Joe Fresh, the youth- oriented apparel brand.
Even as J.C. Penney's sales slid, there was evidence that Johnson's focus on exclusive merchandise was having an impact. The company said sales per square foot increased at locations with boutiques dedicated to Levi's, Izod, Liz Claiborne and Arizona Jean.
Ullman himself pursued a similar strategy during his previous stint as CEO, most notably with the cosmetics brand, Sephora. J.C. Penney opened more Sephora stores last year.
Johnson's emphasis on hip brands was an attempt to capture younger shoppers and "it was the right path for J.C. Penney to take," said Robin Lewis, a retail consultant in New York. "They thought they would shed older and lower-income shoppers and have a new core customer. That would be the end game. If he were given long enough to accomplish this, they would have been poised for growth."
Johnson departed from the traditional department store model with his mini-mall concept of 100 boutiques, and the company now says it's putting the stores-within-the-store in 500 locations rather than 700, as previously announced.
"We expect suspension of new shop-in-shop builds" after the home goods boutiques are finished and cuts to capital expenditures to save cash, said Binetti, who reiterated a recommendation to sell J.C. Penney shares.
J.C. Penney could do worse than take its cues from Macy's, which outperformed most if its peers after CEO Terry Lundgren began adding exclusive merchandise from such national brands as Tommy Hilfiger as well as store-brands like INC. Macy's shares have advanced 9.2 percent over the past 12 months compared with a 59 percent slide for J.C. Penney.
Lundgren built an army of local managers who are free to tailor the merchandise assortment to each of its about 800 locations. He's also trying to lure shoppers in their teens and 20s who shop at malls' specialty stores, by adding 13 new brands this year.
"Macy's is best-in-class in the moderately priced space," said Brian Yarbrough, an analyst with Edward Jones & Co. in St. Louis, who recommends holding Macy's shares. "They have done a great job over the last few years of improving the merchandise and the stores."
Cincinnati-based Macy's sales at stores open at least 12 months expanded 3.7 percent in 2012. Same-store sales sank 25 percent at J.C. Penney and dropped 2.5 percent at Sears Holdings. They advanced 0.3 percent at Kohl's and 4 percent at Dillard's.
It took years for Lundgren's turnaround plan to succeed. Revenue declined for three consecutive years before rebounding in 2011, and per-share profit had a similar sustained negative stretch, starting in 2007.
Macy's also has stolen market share from J.C. Penney by remaining promotional when J.C. Penney was trying to reduce markdowns, Yarbrough said.
"Not to take anything away from what Macy's has achieved, but for the last 15 months they also have been benefiting from Penny's problems," Yarbrough said.
Whatever decisions come in the next few months, it may be that J.C. Penney is too damaged to salvage and should be sold, said George Bradt, managing director at PrimeGenesis, a Stamford, Conn., consulting firm.
"Penney was the place where middle American women went to buy underwear, but now they have lots of other places to go," said Bradt. "Macy's has been able to survive in the middle and do well because they have a real brand and they're edging upscale, but Penney has lost its reason to exist."
— With assistance from Carol Hymowitz in New York.