W&M-M-182

1JCPenney

A New Spin on an Old Idea

The date was November 9, 2012, and Ron Johnson, CEO of JCPenney, had just
finished announcing the companys third-quarter earnings on a private conference
call with stakeholders. He had come into the meeting confident and reassuring,
outwardly optimistic about the development and change that was taking place
across JCP. However, his investors were beginning to lose their patience. The radical
new direction that Johnson had promised them when he was hired nearly a year
earlier was coming along very slowly, and the results so far were less than ideal.
Total sales were down across the board, with Internet sales alone declining by
almost one-third compared to the previous year. JCPenney, as a whole, was not
going to meet any of its target goals for 2012, and the company was continuing to
pile on debt as it dived headlong into the store-within-a-store concept that
Johnson had sold to them back in January. On top of all of this, the company was
feeling backlash from customers about its gay-friendly advertising, and it was facing
impending lawsuits from a variety of sources.
Johnson wasnt faring much better. Just a few months earlier, he had been forced to
fire his friend and right-hand man, JCPenney President Michael Francis, because of
the companys failed implementation of his Everyday Low Prices model, which
was designed to replace the overabundance of sales for which JCPenney had
become known. In his place, Johnsons workload had gotten even worse.
However, Johnson tried to remain positive. To return JCPenney to prominence as
Americas Favorite Store, Johnson knew that radical solutions would be necessary.
When he had initially proposed the revamp of the stores, he had warned investors
that it was a four-year plan, and now was not nearly enough time to see the fruits of
his labor come to fruition. JCPenney was only beginning to transform into the
dynamic store that he had envisioned in his mind, one which, when it was proposed,
was greeted with excitement by a large sector of the industry.
And, yet, how much time Johnson would have to actually implement his plan was
anyones guess. When Francis had been fired, some analysts suggested that it was
because Johnson couldnt fire himself, and, although he received a warm welcome at
his Investors Meeting in September, he hardly had their vote of confidence. Now
1

This case was prepared by Matthew Kippen, MBA 2013 and Kathleen Quin, MBA 2014, under the
supervision of Lawrence J. Ring, Chancellor Professor of Business, and Ronald L. Hess, Associate
Professor of Business, as a basis for class discussion. It is not intended to illustrate either effective or
ineffective management. Copyright, 2013, by the Mason School of Business Foundation Board.

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that things were even worse, Johnson needed to show that his plan was working,
and, if he wanted to keep his job, he had to do it quickly.

Company History
James Cash Penney opened his first retail store, under the name The Golden Rule,
in 1902 in Kemmerer, Wyoming. A 26-year-old entrepreneur, Penney had grown up
on a small farm in Missouri, and, after spending a few years working in local dry
goods stores and learning the trade, Penney sought to open his own franchise store
with the help of some partners. Shunning the popular credit model of the time,
Penney created a cash-only retailer and saw immediate success, with sales of more
than $28,000 in his first year.2
Success begat success for Penney the next couple of years, as he continued to amass
wealth through additional franchise stores. Eventually taking over the entire The
Golden Rule franchise itself in 1907 and buying out its owners, Penney expanded
the company rapidly, stretching the chain from coast to coast and incorporating the
stores into a new brand, JCPenney, in 1913. Penneys success had much to do with
his commitment to private-label goods. Rather than stock his stores with lowmargin, high-priced brand names like most other contemporary retailers, Penney
instead sought to provide quality store brands whose margin and production could
be managed and maintained by him directly. Customers flocked to the idea of buying
cheap clothing that was comparable in quality to the name brands, and it helped
propel JCPenney toward the top of the retail industry in short order.
By 1936, sales had reached nearly $250 million and JCPenney had 1,496 stores, in
nearly every state. JCPenney also was one of the few retailers to continue to thrive
through The Great Depression, as its continued reputation for high-quality, low-cost
products encouraged customers to use the retailer for their everyday needs. The
company reached $1 billion in sales not long after, in 1951, one year shy of its 50th
anniversary. JCPenney also was starting to adapt to changing consumer habits as the
years progressed. The company issued its first credit card, breaking away from the
cash-only model that had sustained it since the very beginning, and expanded its
merchandise to include sporting goods, electronics, home appliances, and furniture.
JCPenney also took advantage of the rising trend in mail-order businesses and
created the JCPenney catalog.
Struggles of the 70s What IS JCPenney?

http://www.fundinguniverse.com/company-histories/j-c-penney-company-inc-history/

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In 1971, James Cash Penney died at the age of 95. Following his death, Penneys
namesake had begun to hit a stagnant growth period. Sam Walton, a former
employee at JCPenney, and his Wal-Mart stores were gaining rapid traction within
the U.S. market, utilizing much of the same discount business model that Penney
had. In addition, Sears, a longtime retail rival to JCPenney, had begun encroaching
on their hardware and appliance businesses, and were having much greater success
at it. Specialty stores also were becoming a strong growth market in the U.S., and
were providing a significant challenge to JCPenney, which had become satisfied with
straddling both the mass-merchandise and department store markets without fully
committing to either.
As Walter Neppl took over as president in 1976, JCPenneys awkward positioning
had finally begun to eat away at earnings. Trying to be everything to everyone was
no longer an option for the company, and the question of where JCPenney was going
to position itself was becoming louder by the day. If JCPenney chose to remain in the
mass merchandising market, it would be fighting directly with stores such as Sears
and Montgomery Ward, both of which already had great success in the area at
JCPenneys expense. However, if JCPenney chose to specialize as a department store,
it would be abandoning a huge section of commerce, and would be banking on its
ability to become a leader in fashion and to appeal to wide demographics of specific
tastes, something that, up until then, was a foreign concept.
Ultimately, though, by 1982 Neppl and his executive committee decided that
JCPenney would fully position itself as a department store in order to survive going
forward, and they subsequently de-emphasized all of their product lines outside of
fashion apparel and home furnishings, which was later spun off into a different store
altogether, sacrificing nearly $1.5 billion in annual sales in the process.
1980s to 2000s: The Rise and Fall of the new JCP Model
Neppls decision paid off. During the next 10 years, JCPenney was able to
successfully transition to become one of the biggest names in department store
apparel, especially among women. JCPenney also had taken the extra step of
positioning itself within regional malls, central locations for much of the revitalized
department store sales. The companys numerous stores throughout the United
States ensured prime position in almost any major shopping district.
Consumers also were beginning to put much more of an emphasis on brand
purchasing, relating the attached names to quality and social status, while a negative
connotation was starting to form over private label brands, deeming them as
cheap and unattractive. JCPenney adjusted its catalog appropriately, bringing in
such big names as Haggar, Jockey, and Levi Strauss to help diversify and promote its
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newly minted department store image, while also de-emphasizing the private label
merchandise that had defined the store for decades. JCPenney also made some huge
splashes with its promotion of proprietary brands, such as the Original Arizona Jean
Company, which amounted to nearly $400 million in sales in 1993.
However, this success did not last long into the new millennium. Growth slowed
during the 2000s; as JCPenney began to see competitors eat into its market share.
The company had become bracketed by department stores such as Macys from
above, while discount stores such as Target encroached from below. JCPenneys
market position became much more focused upon continuous sales and price
competition rather than quality and value, with the company having, on average,
590 sales a year. Although private label products began to re-emerge within the
stores toward the end of the 2000s, JCPenney was still not able to regain the
foothold that it had once had within the male and childrens demographics.
It was a well-known secret that JCPenneys data systems were outdated compared
to the rest of the retail industry. The company relied heavily on integrated legacy
systems, each of which had to be individually updated when new systems were
introduced. Outside of just logistical concerns (the company was incapable of
receiving customer reports in real time due to the system complexity), updating the
systems was a very time-intensive aspect of the companys infrastructure, and one
that was unduly expensive, costing anywhere from $2 million$10 million per
update. 3
The companys once-boisterous catalog business also fell to the wayside as the
decade rolled to a close, finally collapsing in 2011, and JCPenneys online
component, introduced in 1998, was facing slowing sales thanks to poor customer
service management and an obtrusive, outdated design. The company knew that
there were many changes that needed to happen.
It was at this point that JCPenney, seeking a new voice to spark innovation in their
faltering retail practice, approached Ron Johnson in June 2011 about taking over as
CEO for their company and to help them rise back into prominence.

Ron Johnson The Apple Store Innovator

http://mobile.blogs.wsj.com/cio/2012/05/16/revamping-j-c-penney-systems-may-take-longer-than-a-year/

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Johnson, a seasoned business executive of more than 30 years experience, was
considered to be a genius in the retail industry.4 Graduating from Harvard
University with his MBA in 1984, Johnson had spent the first 15 years of his career
with Target, working within its vast merchandising sector. Quickly rising into an
executive role within the company, Johnson spearheaded the successful Design
Initiative in 1998. It was an annual merit-based design competition geared toward
fashion design students, wherein the winners would be offered a one-year
scholarship at their school, followed by a job at Target upon graduation.5 The
program was unique and incredibly successful, infusing fresh talent into Targets
private label business while at the same time reinforcing its label as a fashionforward focused company.
Apple Inc., and especially Steve Jobs, took notice of Johnsons achievements and
brought him aboard the company in January 2000. Facing a declining share in the
computer market, and a failure of third-party stores to successfully market and sell
its products, Apple was looking for a new way to breach the retail arena, and tasked
Johnson with finding a solution. One year later, the first Apple Store was opened.
Johnsons perspective behind building these stores was that they concentrate on
more than just the purchasing experience. He wanted customers to feel that they
were building a unique relationship to Apple itself, and taking ownership of the
products as they tested them in person. In Johnsons words,
We didnt think about their experience in the store. We said, lets design this
store around their life experience. We said theres a bigger idea. Lets design
it around the customers life, not the moment when theyre in the store. We
said, we want our stores to create an ownership experience for the customer.
Thats what we try to create. We like to think thats where it begins.6
Further, he saw it as a store for everyone, a place that would be welcoming to all
ages and where people could feel they truly belonged. He didnt want his staff to
focus on selling merchandise, but rather to focus on doing whatever it took to make
their customers lives better, even if it meant referring them to another store. And,
most importantly, he wanted to constantly build the customers relationship to the
company, making the Apple Store more than just a store, and have people come
[there] for the experienceand [be] willing to pay a premium for that.

http://www.jcpmediaroom.com/posts/6/Ron-Johnson- Ron Johnson Bio

http://www.thefreelibrary.com/CFDA+Announces+Two+Winners+of+the+2003+Target%2FCFDA+Desi
gn+Initiative.-a0131710267
6
http://www.cultofmac.com/100807/steve-jobs-and-ron-johnson-on-apples-retail-success-quotes/
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With these ideas in mind, Johnson spearheaded the inclusion of such radical ideas as
a Genius bar, modeled after a concierge desk at a hotel, where customers would sit
on stools and, instead of alcohol, the employees would serve them advice and help
on any matter of problem that they might have. Johnson also concentrated on
making sure employees had a real passion to work at the stores, and treated such a
role as an honor. For this reason, Johnson did not hire employees to be compensated
on commission, which incentivized product up-selling. The recruiting process was a
multistep process, taking anywhere from six to eight interviews before a candidate
was finally hired.7 This process helped ingratiate the idea of exclusivity into
potential hires, who would, in turn, be key in cultivating this message to customers
visiting the store.
Apples Success and Johnsons Transition
At the beginning, most retail observers thought Johnsons Apple Stores were
doomed to fail. BusinessWeek ran a story in May 2001, mere weeks before the first
stores grand opening, entitled Sorry, Steve: Heres Why Apple Stores Wont
Work.8 Voicing many of the hesitations that tech media had toward the new
venture, the article argued that customers already had developed relationships with
their electronics stores, where they could easily and less expensively buy their Mac
products, and that Apples approach, while novel, would not be able to lure them
away based on service alone. The article also argued that, without new products, not
only would the store model sink, but so, potentially, would Apple.
However, where the media saw only negatives, Johnson and Jobs saw nothing but
opportunity:
We had four products, two portables and two desktop computers. ... But, it
ended up being the ultimate opportunity, because we said, because we dont
have enough products to fill a store that size, lets fill it with the ownership
experience. So, we quickly moved from a buying experience to an ownership
experienceGenius Bars, theaters, and face-to-face help and friendly people.
But, we had a liberty that most retailers dont have, that are overstuffed with
products. You know, you dont have the space to innovate!9
The first Apple Stores, bolstered by their unique conceit and the companys
7

http://9to5mac.com/2011/11/21/ron-johnson-how-i-built-the-apple-store-on-experience-not-commisions/
http://www.businessweek.com/stories/2001-05-20/commentary-sorry-steve-heres-why-apple-stores-wontwork
9
http://www.cultofmac.com/100807/steve-jobs-and-ron-johnson-on-apples-retail-success-quotes/
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innovative mindset, experienced moderate success throughout the first year, mostly
attracting Apple loyalists willing to try something new from the Mac company.
However, in October 2001, with the introduction of the iPod, everything changed.
Johnsons stores, sparked by the huge wave of interest in Apples new marquee
product, were pushed to see how far the concept of the ownership experience
could go. And, as more and more customers came to the Apple Store to try the iPod,
carefully guided by the hand-picked employees at each store, the more Johnsons
concept was not only vindicated to his critics, but lauded as the next stage in retail
development.
The base role of this new ownership culture, where customers took a personal stake
in Apples success and felt the highs and lows together with it, suddenly took hold
and created a subculture of enthusiasts for the brand. And, as Apple continued to
innovate with new products, and push innovation to new heights, Johnsons model
bent and moved along with it. During the next 10 years, Johnson would continue to
innovate and build up the Apple Store brand, opening 323 stores throughout the
world, each generating $40 million annually, and garnering more than 1 billion
unique retail visitors in the process. By 2011, the Apple Stores achieved sales of
$5,626 per retail square foot, the highest of any retailer in the U.S. by nearly double.
The second highest, Tiffanys, only sold $2,974 per square foot.10

Myron E. Ullman and the failure of Every Day Matters

Coming into 2011, CEO and Chairman Myron E. Ullman III had sat in the drivers
seat of JCPenney since December 2004. Ullman, a former executive with Macys and
Louis Vuitton Mot Hennessy, entered the brand under the auspices of
reinvigorating the current model and contending with higher-end retailers such as
Nordstroms. To this end, Ullman looked for innovation in house, introducing new
private label brands American Living and Linden Street, while also taking
JCPenneys prominent brand inventory and restyling each one as a separate concept,
built to resemble the model of name-brand merchandise. The company also
partnered with Seattles Best Coffee to have branded cafes at every location, nearly
identical to Nordstroms caf stores.
Seven years into his tenure, Ullmans results had been tenuous at best. Despite a
promising start, premised on the desire to finally move JCPenney away from its
near-bankruptcy in the early 2000s and into retail industry leadership within five
years,11 Ullman had largely failed to live up to his promise. His decision to compete
against more high-end retail stores clashed with much of the brand perception that
10
11

http://9to5mac.com/2011/05/19/feature-retail-stores-apples-big-gamble-that-paid-off-big-time/
http://library.corporate-ir.net/library/70/705/70528/items/192659/JCP_AR05.pdf

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the company had built up in its near-century existence. In addition, by concentrating
its strategy in developing its brands against big names such as Ralph Lauren and
Levi Strauss, JCPenney failed to counter rising competition from value-retailers such
as Kohls and Target.
JCPenneys corporate value also had plummeted, with revenues of $17.8 billion and
a net income of $389 million in 2011 in comparison to $19.9 billion and $1.13
billion, respectively, in 2007.12 During this span, JCPs stock price also had dropped
55 percent, and was threatening to fall further. At the same time, the company was
lagging behind the rest of the retail industry in sales per square foot and in returnon-assets (for complete analysis, see SRM and SPM tables in Exhibit I and II).
JCPenneys board of directors was out of ideas about how they could turn the
retailer around, and were in dire need of an infusion of creativity into their stagnant
organization.
In other words, Ron Johnson would have his work cut out for him.
Johnsons New JCP
Johnson wasted little time jumping into the weeds and fleshing out a new business
model for the company. Identifying that the changes he had planned would be
drastic and revolutionary, Johnson retreated from the limelight for the next couple
months, developing and crafting his new stratagem for JCPenney. Much like Ullman,
he promised massive changes to the business model, and an assurance that the
company would once again become Americas favorite store.
In January 2012, Johnson unveiled his new model for JCPenney, along with a new
logo. Centering on seven basic principles (Personality, Price, Promotion, Product,
Presentation, Place, People)13 and spanning a four-year implementation cycle,
Johnsons goal became to grow through constant reinvention of the companys
stagnant business model by:

Focusing strategic initiatives around the elevation of JCPenney brand

Establishing fair and square approach across all platforms
Creating a relevant and inspiring shopping experience
Obtaining market share by appealing to EVERY American
Capturing customers attention through amplified messaging and media14

12

http://247wallst.com/2012/04/02/jcpenneys-shameless-board-rewards-departing-ceo/
http://media.corporate-ir.net/media_files/IROL/70/70528/reports/JCP_2011IAR/HTML1/jc_penneyar2011_0004.htm
14
Kantar Retail JCPenney A Look at the New JCPenney April 2012
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Johnson, drawing from the same inspiration that helped fuel his development of the
Apple Stores, wished to sell the experience of shopping at JCPenney, rather than to
concentrate on the illusion of savings. Johnson believed JCPenney sold a certain
lifestyle, one that was accessible to all age groups and sects of the middle-class
American customer. The key, he believed, was to earn that traffic through the
building of merchandise and content and experiences,15 rather than constant sales.
If he were successful at uniting the JCPenney model under a single idea, and
expanding that idea into every facet of the store, customer buy-in would come as
they embraced the JCP ideal into their lifestyle.
Johnsons first big task, the logo redesign, was his proving ground. Removing
Penney from its corporate label for the first time in the companys 110-year
history and replacing it with the simplified JCP, Johnsons new logo was a sleek,
boxy red, white, and blue placard reminiscent of the American flag. The logos goal,
to speak to the everyday customer and evoke a feeling of Americas hometown
store, as senior VP of creative Greg Clark put it, was a point of pride to the creative
team, so much so that the logo was not tested prior to implementation.16 Whats
more, the logo helped to spark talk of JCPs new Fair and Square business strategy,
something that would come to define Johnsons new stratagem.
Fair and Square
One of the main tenets of Johnsons vision, Fair and Square was to be the clear
differentiating symbol for JCP against the rest of the retail industry, and a direct
appeal to customers that Johnson identified as being tired of the constant stream of
promotions that plagued most stores. Ostensibly a detailed pricing plan, Fair and
Square completely abolished JCPenneys old sales structure in favor of a threetiered model:

Everyday Prices
Month-long Values
Best Prices

Everyday Prices were the opening price points that all store merchandise would be
placed at on shelves. On average, these were to be 40 percent lower than JCPenneys
previous mark-ups in 2011. Month-long Values, in contrast, was the companys
answer to retail sales, a revolving door that would focus on new brands and
15

http://www.businessweek.com/articles/2012-08-09/ron-johnson-on-the-progress-of-his-j-dot-c-dotpenney-remake#p3
16
http://online.wsj.com/article/SB10001424052970204624204577183304124402064.html

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merchandise on a clear, rotating schedule. On average, these would receive a
discount of 25 percent off Everyday Prices. Best Prices would be products marked
down at clearance-like pricing, with items appropriated to these racks on the first
and third Friday of each month, to align with the typical paycheck cycle. These
changes were accompanied by a new global return policy, where any product could
be returned to any JCP location. On top of this, JCP also would do away with their old
pricing method: rather than list items to their $.99 mark like most of their
competitors, they would post their products at whole dollar amounts.
The results of this, if successful, would be staggering, according to Johnson. In 2011,
JCPenney had spent nearly $1.9 billion on advertising its 590 promotional pricing
campaigns, which had resulted in an average of four store visits per year by the
average customer (For complete JCP Financials, see Exhibits III-V). With Fair and
Square, Johnson forecasted marketing spend dropping more than 96 percent, to
$80 million per year, a direct result of decreased pricing campaigns (only 12, to
coincide with the new Month-Long Values). In addition, by emphasizing these few
campaigns and successfully promoting them to customers, JCP predicted a threefold
increase in average shopper visits.
Johnson, however, understood that the only way that Fair and Square could
succeed was through direct and clear communication by the company, as much of
the strategy would require a re-education of what customers could expect from
the retail buying experience. By syncing every element of our business to the
monthly rhythm of our customers lives, and in turn receiving buy-in from an
informed customer base, Johnson was sure that Fair and Square could blossom
into the next great evolution of the retail model.
A New Shopping Experience SWAS and Town Square
The other large piece of Johnsons new JCP was his revolution of the stores
themselves. Johnson believed that the next step in retail was for retailers to become
homes to stores-within-a-store (SWAS), a concept of building a micro-community of
brands and products all centered within a single brick-and-mortar concept. In the
past, JCPenney had seen great success with this model in miniature, as separated
Sephora and MNG by Mango sections had both been warmly received by JCP
shoppers. To this end, Johnson went one step further and decided to reimagine all of
JCP as a SWAS, with anywhere from 80100 curated shops placed throughout a
typical 100,000-square-foot store. In addition, Johnson hoped to be able to have
store diversity within this concept, with JCPs then 1,102 retail locations being able
to mix and match brands according to perceived demand and community desires.
Already, Johnson had Levis, Martha Stewart, Izod, Liz Claiborne, and its private

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label, Arizona, committed to designing its store concepts, and was working through
JCPs already-vast brand network to expand its potential catalog.
Tying all of these SWASs together would be a Town Square, a localized hub within
the center of each store that would offer nonmerchandise attractions and act as a
place customers could relax while in the middle of shopping, and also learn more
information about their shopping experience. Akin to a central park in the middle of
a busy intersection, Johnson saw the Town Square, which would measure about
10,000 square feet in each store, as a necessary branch within the new JCP model, a
secondary zone necessary for those who might not yet be ready to shop the stores
new model.
In terms of rollout, Johnson planned to immediately begin working to segment each
store, with Liz Claiborne stores going up as soon as August 2012, with Izod and
Arizona to follow in the fall. Continued SWAS introduction would progress at a clip
of two to three stores per month, until each store was fully segmented. Town
Squares would be developed immediately, and present in all JCP locales by 2013.
Outside of this, JCP also would focus on a much more refreshed aesthetic,
concentrated on ambiance and lighting, as well as simplified layouts. Johnson, when
touring JCPenney initially, quickly noticed that many stores were overly cluttered,
and had very few punctuation points for traffic when aisles became congested. By
fixing these two areas, he believed that products and brands would be better
highlighted in their individual areas, while at the same time improving customer
access and thru-traffic. He also wanted to introduce the idea of a rotating cadence,
which entailed each stores color palette altering on a month-by-month basis
through lighting and specialty fixtures. Johnsons belief was that, by adjusting each
stores feeling on a regular basis, stores would be able to re-energize themselves
as the seasons passed.
Building The Brand Experience
Johnson also knew that the change in the sales and store structure would be all for
naught if JCP wasnt able to successfully convey the brands new personality to the
marketplace. Its first step, the revamped logo, managed to capture the many new
ideas that the store would represent, and Johnson was confident that it had a
malleable quality that suited it for multiple purposes.
Looking for the same thing in a spokesperson, Johnson tapped Ellen DeGeneres to
take over the role. A daytime talk show host, media darling, and one of Forbes Top 5
Most Influential Women, Johnson believed they couldnt think of a better partner
to help us put the fun back into the retail experience. With cross-market and
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generational appeal, he argued that Ellen provided a unique avenue for the company
to directly target their base consumers while also finding a new way to appeal to
growing younger demographics, who might not have the same positional image of
the company as their parents.
Johnson also knew that, if he were to successfully re-educate customers, then he
would first have to do the same for his employees. Continuing to follow Penneys
famous Golden Rule as his predecessors had, Johnson believed that, by not overtly
changing the training process for new employees and managing them much as they
had been managed in the past, would maintain the high level of quality for which
they had been known. JCPenneys American Customer Satisfaction Index (ASCI)
score ranked only behind Nordstrom for all major U.S. department stores. However,
Johnson did acknowledge that it would take some time for employees to buy in to
his vision for the company, in part due to the constant flux that the company had
been under the last few years (Johnsons new logo design was the second in the past
year) and especially because his plans included an eventual 10 percent cut in
corporate employees in order to implement a planned $900 million cost reduction
during the next two years.17
Investors were clearly excited by the prospect of Johnsons radical change. Upon his
announcement, shares rose nearly 19 percent, to $41.72.18 Others in the retail
industry also waited with baited breath to see if Johnsons gambit would work. If it
did, it could mean a radical shift in the future of retailing, as they knew it. And, more
than this, it would mean a familiar competitor gaining a second wind just as the U.S.
was clawing itself out of the 2008 financial disaster. If it failed, though, it could very
well spell the end of JCPenney.

The New JCP Ten Months In ...

As the first full year of Johnsons bold new strategy neared its end, much was said
about the progress JCP had made the last year. Unfortunately for Johnson, very little
of it was positive.
Despite the overhaul of the stores, a renewed concentration on building the brand
through an emphasis on quality and differentiation, and Johnsons resounding
pedigree in retail, JCPenney had failed to get new customers into its stores and,
worse, had caused many of its longtime customers to abandon ship. Many in the
media attributed this to a poor marketing effort on the part of Johnson and Michael
Francis, JCPenneys president and a former Target executive credited with
17
18

http://investorplace.com/2012/01/jc-penney-apple-ceo-ron-johnson-jcp-tgt-wmt/
http://investorplace.com/2012/01/jc-penney-apple-ceo-ron-johnson-jcp-tgt-wmt/

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successfully overhauling its image from a discount value-brand to a trendier fashion
retailer. JCPs commercials, featuring screaming women ripping apart coupons,
were seen as doing little to sell the new image that Johnson was trying to push with
Fair and Square. The companys circulars, often popular due to the litany of deals
contained within, also had become all but useless under the new pricing structure.
However, Johnson saw the companys failure to launch as a blatant
acknowledgement that customers dont get our pricing strategy.19 Instead,
Johnson argued, coupons were a drug that retailers had spent years imbedding
into customer psyche, and this had prevented the company from, to this point,
successfully getting Fair and Square across to its U.S. audience. Nevertheless,
Johnson believed that it was only a matter of when, not if, customers finally came
around to JCPs thinking.
In the first quarter of 2012, only two months into Fair and Square pricing, the
companys same-store sales dropped 18.9 percent versus Q1 2011, resulting in a net
loss of $55 million for the period and a cut in its planned dividend entirely.20 In
addition to the loss of deal-hunters and coupon addicts, JCPenney also was facing
heat about Ellen DeGeneres hiring. Conservative groups such as One Million Moms
provided significant pushback to JCP, accusing the company of purposefully
alienating its major consumer basetraditional familiesby hiring an openly gay
brand ambassador.21
They also claimed that, by hiring Ellen, JCP was taking part in a culture war, one
that would cost them severely as it retooled its brand. This was further aggravated
when the company began unveiling new advertisements in its spring catalogs,
including one of a gay Dallas couple playing with their two children. As the summer
months approached, the company also began facing a litany of lawsuits, including
one from Macys against JCPs use of Martha Stewarts products in its stores, with
Macys claiming that it had exclusive rights to sell the brand.
From Bad To Worse
As June arrived, news began to reach Johnson that Q2 was shaping up to be far
worse than management had previously thought, and potentially one of the worst
the company had ever seen. JCPenneys attempts to re-educate its customers using
Fair and Square had continued to sputter, with customers fleeing the company in
droves, and Johnson would soon be faced with the unenviable task of trying to
19

http://www.dailyfinance.com/2012/05/16/jcpenneys-ron-johnson-customers-dont-get-our-pricing-strateg/
http://www.huffingtonpost.com/2012/05/16/jc-penney-first-quarter-2012_n_1520753.html
21
http://latimesblogs.latimes.com/showtracker/2012/02/anti-gay-group-slams-jc-penney-for-hiring-ellendegeneres-.html
20

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explain continued and exasperating failure to stockholders that, not six months
earlier, he had promised a plan that would be a certain success.
In addition, all of Johnsons cost cutting had an unexpected consequence: he seemed
to be disenfranchising his core employees. From company-wide job cuts to a revamp
that had done little to engender buy-in from longtime JCP employees, some felt that
Johnson cares more about the stakeholders interests than the employees.22 The
constant company change, as Johnson had to constantly re-adapt his strategy as
problems arose, was taking its toll on everyone in the company, and a feeling of
fear and uncertainty was omnipresent in the company. Johnson felt that his
employees would change and adapt like he expected his customers to do. Both
seemed to be hard sells.
Knowing that he would need to make some changes to explain the companys
ineffectiveness, Johnson was forced to fire Francis as president, taking over the dayto-day merchandising and marketing functions of the company in the meantime.23
In addition, despite continued insistence that customers could learn the new pricing
system and be weaned off their addiction to couponinggoing so far as to run Do
the Math ads to walk its customers through how they could save more using JCPs
system than traditional retailersJohnson was running out of ideas. Under
pressure to recoup some of the companys lost market share, Johnson chose to
discontinue the Month-long Value tag the company had been utilizing within
stores, instead, in Johnsons words, calling it what we intended to do ... a sale.24
By July, things got even worse, as S&P finally downgraded the companys debt to
junk status.25 The official Q2 numbers came in, with revenue down 23 percent
(same-store revenue down 21.7 percent), net losses sitting at $147 million, a
decrease of $.67 a share, and overall customers down 12 percent compared to the
previous year. Johnson attempted to spin the numbers a multitude of ways,
promising new changes for the company, such as implementing paperless checkouts
via iPads by 2013, with the potential of self-service checkouts by 2014, and starting
new advertising via newspapers. Johnson also announced an agreement with Oracle
Systems to outsource many of JCPs most complex systems through Oracles suite
technology. In addition to millions in expected annual savings for JCPenney, both
from being able to scrap its expensive, customized legacy systems and from a deep
cut in IT personnel needed to operate it, Johnson saw a number of operational
benefits that could come from the overhaul, including the ability for real-time
22

http://info.profilesinternational.com/profiles-employee-assessment-blog/bid/106694/Learn-from-JCPenney-s-Mistakes-3-Ways-to-Reduce-Employee-Turnover
23
http://www.dallasnews.com/business/retail/20120618-struggling-j.c.-penney-fires-its-president.ece
24
http://www.reuters.com/article/2012/06/05/jcpenney-sale-idUSL1E8H57FZ20120605
25
http://www.tulsaworld.com/business/article.aspx?subjectid=53&articleid=20120712_53_E3_CUTLIN813
22

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customer tracking and on-notice reports to handle preference adjustments per
store. 26
However, these changes did little to silence his critics. Things became so dire that,
by September, Johnson started to talk about how an August decrease in traffic by 7
percent was an improvement overall for the company.27 Nothing, however, could
prepare him for just how dark things would become once the Q3 reports came to
light.

Panic In Sight Could JCP Be Saved?

The Q3 reports, showing an additional $203 million quarterly loss and a stock price
that, now at $19.78, was down roughly 38 percent on the year, were punishing to
Johnson. Despite his great attempts, JCPenney was falling further and further behind
its competition, and Johnson was facing pushback from every angle of the company,
with projections showing that things were only slated to get worse.28
What could he do at this point? Was staying the course still the answer, given the
poor results that his first year had yielded? After all, Johnson had himself said that
the full results of the strategy couldnt truly be measured for a few years, and change
was ultimately not something he could rush. However, with JCP falling further and
further behind, there was a chance that the company could end up bankrupt before
he ever got a chance to see his full vision become a reality.
On the other hand, Johnson knew that he could very well be out of a job if the Q4
reports continued to show losses at a similar clip to the last three quarters. He had
precious little time to lose; even more so given the fact that any altered strategy
would take time to implement, and resources dedicated to ensure it was done well.
There also was a creeping fear among industry professionals that JCPs demise
already was decided, and Johnson was just attempting to delay the inevitable for a
company that had long ago forgotten who its customers were, and what its identity
was. As Johnson finished his conference call with shareholders, the former Appleexecutive faced a difficult proposition. Could he right the course of JCP before it was
too late or, like many a captain, would he sink along with his ship?
Acts of Generosity
26

http://bizbeatblog.dallasnews.com/2012/07/it-layoffs-at-j-c-penney-are-followed-by-major-systemscontracts-with-oracle-corp.html/
27
http://www.retaildoc.com/blog/retail-sales-lesson-j-c-penneys-train-wreck-turnaround/
28
http://www.marketwatch.com/story/jc-penney-q3-loss-eases-core-results-down-2012-11-09

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W&M-M-182
In an attempt to draw more customers, JCPenney kicked off the 2012 holiday season
with an in-store promotion. Beginning on Black Friday and running through
Christmas Eve, customers received a holiday button as they entered the store. The
back of each button contained an instant win code that customers could enter at
JCPenney.com. Prizes for entering the code ranged from JCPenney gift cards and
merchandise to a trip to Disneyland. Johnson described the promotion: Instead of
mailing out millions of coupons, well be handing out millions of buttons. We
believe in acts of generosity. Johnson was still avoiding the use of traditional
coupons and promotions in the hopes customers would soon become comfortable
with the Every Day pricing strategy JCPenney had implemented 10 months
previous. Recognizing promotions are essential during Christmas, Johnson allowed
JCPenney to keep two holiday traditionsBlack Friday and Cyber Monday. Johnson
promised, the lowest prices ever in the history of our company. Because
customers already were confused by the new pricing strategy, Black Friday in-store
signs and newspaper inserts educated shoppers of the price difference between the
Everyday price and the Black Friday price. 29
By February 2013, fourth quarter losses were announced and JCPenneys worst
fears were realized. 2012 saw a net loss of $985 milliona loss of $4.45 per share.
Fourth quarter 2012 net loss was $552 milliona loss of $2.51 per share. It was
unclear how much the holiday promotions helped final fourth quarter earnings, but
it was obvious the promotions alone were not enough. Despite major losses and
disappointment, Johnson was still supporting his new model:
Sales and customer traffic were below our expectations in 2012, but as we
execute our ambitious transformation plan, we are pleased with the great
strides we made to improve JCPenneys cost structure, technology platforms
and the overall customer experience. We have accomplished so much in the
last twelve months. We believe the bold actions taken in 2012 will materially
improve the Companys long-term growth and profitability.
Despite major losses and continued disappointment, Johnson enthusiastically
focused on the immediate future of the company; Looking ahead, we are energized
by our shop roll out plans for 2013 and the exciting work our teams are undertaking
to transform the store. 2013 promised a new marketing campaign focusing on
value and style, incorporating new brands and updated merchandise, and enhancing
the customer experience both online and in stores. 2013 also would focus on
attracting new customers and reconnecting with the lost core customers.30
Changes at JCPenney

29
30

http://www.usatoday.com/story/money/business/2012/11/11/jcpenney-holiday-strategy/1684411/
http://www.businessinsider.com/jc-penney-q4-2012-earnings-2013-2#ixzz2emabPDc2

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Bill Ackman founded Pershing Square Capital Management in 2004. The hedge fund
manager became a member of the JCPenney Board in early 2011. By August 2013,
Pershing Square owned about 18% of JCPenneys stock.31 Ackman was instrumental
in the hiring of Johnson, and continued to be supportive until March 2013.
Disappointed in continuing losses, JCPenney board member Steven Roths Vornado
Realty Trust, JCPenneys second largest stakeholder, unloaded more than 40 percent
of its stake in March 2013. Ackman, along with other board members started to
watch Johnson closely before finally cutting him loose in April 2013. Despite being
Johnsons initial cheerleader, Ackman eventually admitted that Johnsons impact on
JCPenney was, something very close to a disaster.32
Johnson Out
After 17 long months, Johnson was finally out as CEO. Johnson had a successful
history in retail, being credited with the revival of Target and helping propel Apple
Stores to popularity. Benefiting from these successes, Johnson was given more time
than what would have normally been allowed to recreate JCPenney. Johnson
promised to do for JCPenney what he had done for Target and Apple, namely bring
his past success and ideas to JCPenney in an attempt to improve and modernize the
aging brand. While Johnson delivered on the promises he made, the changes he
implemented proved unsuccessful.33
No Coupons or Sales
Beginning in 2012, JCPenney switched to an everyday low pricing model. These
everyday low prices were branded as fair and square with the idea being there
would be no perpetual sales. The price was as low as it was going to be, ensuring
costumers were always getting the lowest price possible. The prices were set as low
as they could go for the store to turn a profit and sales promotions were eliminated.
In turn, this proved confusing to customers. Shoppers favor bargain hunting, and the
feeling of getting a great deal. Johnson took this consumer pleasure away by
eliminating sales, coupons, and promotions. Additionally, customers did not
understand the everyday low price model, suspicious they could get the
merchandise cheaper than the listed sale price. Johnson managed to alienate both
core and potential customers. Johnson finally admitted defeat:
I thought people were just tired of coupons and all this stuff. The reality is
all of the couponing we did, there were a certain part of the customers that
31

http://www.forbes.com/sites/steveschaefer/2013/08/09/ackman-j-c-penney-board-is-flying-blindchairman-needs-to-go/
32
http://nypost.com/2013/04/06/ackman-bashes-jcpenney-ceo/
33
http://business.time.com/2013/04/09/the-5-big-mistakes-that-led-to-ron-johnsons-ouster-at-jcpenney/#ixzz2emrlGF1z

17

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loved that. They gravitated to stores that competed that way. So our core
customer, I think, was much more dependent and enjoyed coupons more
than I understood.
No Test Runs
Johnson was confident in his ideas and strategies stemming from his monumental
success at both Target and Apple. This inflated sense of confidence led Johnson to
implement many ideas without testing them. Additionally, Johnson failed to see the
remarkable differences between the Apple customer and the JCPenney customer.
When questioned about testing new strategies before rolling them out, Johnson
replied: We didnt test at Apple.
Deserted Core Customers
As CEO, Johnson never took the time to get to know the typical JCPenney customer.
Instead, Johnson used the same ideas that had been successful for him at Target and
Apple, forcing them into the JCPenney framework. Johnson failed to recognize the
importance of sales and coupons to the JCPenney core customers. By eliminating
traditional promotions, Johnson managed to confuse and ultimately alienate
customers. Johnson also completely revamped the store in an effort to focus on a
younger, cooler audience. Johnson assumed the traditional JCPenney customer
would be comfortable with the new store model and brand, but failed to recognize
the typical JCPenney customer was older and did not have the income level he was
looking to capture.
Failed Re-Brand
Johnson was instrumental in the creation of the Apple Store and is credited with
developing the Genius Bar.34 Because of his time at Apple, Johnson came to
JCPenney focused on innovation and creativity. He envisioned turning the stores
into a place customers would think was fun to be, similar to the Apple Store concept,
and thought customers would be willing to buy things at the listed fair and square
price. Finally, Johnson planned to eliminate checkout counters in what would be
another blow to the regular JCPenney customer. RFID (radio frequency
identification) technology was to be used to check customers out throughout the
store. This model was similar to Apples in store checkout technology. As of January
21, 2013, the RFID implementation was on hold.35

34
35

http://management.fortune.cnn.com/2012/03/07/jc-penney-ron-johnson/
RFID Journal J.C. Penney Pauses RFID Efforts January/February 2013

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Ackman summarized Johnsons time at JCPenney well: One of the big mistakes was
perhaps too much change too quickly without adequate testing on what the impact
would be.
Ullman Back In
Ullman was brought back to fill the hole left by Johnson at JCPenney. Ullman had to
work quickly to turn around the sinking retailer. Ullman faced two major problems:
low cash that continued to dwindle and a declining number of customers.36 Ullman
needed to make immediate decisions regarding marketing efforts and pricing
policies, both of which had failed under Johnson. To start the decision-making
progress, Ullman had to first discover who the true JCPenney customer was. Johnson
had unsuccessfully tried rebranding the store to target a younger, trendy market
segment, but the typical JCPenney customer was 55 or older. Twenty-nine percent
of the customers had an annual household income less than $35,000, while only 13
percent of customers had an annual household income greater than $100,000.
JCPenney customers were older, price sensitive, and mostly set in their shopping
ways.37
Making Moves
The first 20 days
Ullmans first task was to reconnect with core customers. Within the first 20 days,
sales promotions returned to JCPenney. Newspaper coupons reappeared, along with
stronger markdowns.38 Johnson priced clothes at the lowest possible price,
eliminating the necessity for sales. Ullman recognized the need to slowly mark
clothing prices back up to regain sufficient margins. By having higher markups,
customers could experience a better markdown. Building in the margins allowed
JCPenney to turn a higher profit, something Johnson could not accomplish.
Next, Ullman slowed down in-store revamps. Johnson had initiated these costly and
aggressive shop rollouts throughout the department store.39 Ullman also looked to
recover private brands that were previously pushed aside. Finally, Ullman looked to
the typical JCPenney customer by switching to more classic apparel for customers
35 and older, getting away from the tighter fits that were currently populating the
retailer.39

36

WWD Ullman in Race Against Time at Penneys April 2013

http://www.businessweek.com/articles/2013-04-10/j-dot-c-dot-penneys-shoppers-are-older-poorer-thanyou-thought#r=hpt-ls
38
http://business.time.com/2013/04/16/attention-jc-penney-shoppers-look-out-for-the-return-of-salesgalore/#ixzz2emrFzwCp
39
WWD Penneys B-T-S Strategy Seen as Key to Revival April 2013
37

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W&M-M-182
JCPenneys Olympics
Back to School (b-t-s) was a prosperous time of year for JCPenney. The retailer
always managed to have a large share of the b-t-s market, but this opportunity had
suffered under Johnson.37 Internally, Ullman referred to b-t-s as JCPenneys
Olympics, recognizing the value and potential earnings b-t-s offered. Ullman saw
this as a huge opportunity for the retailer to regain both market share and core
customers. Young & Rubicam was hired to create JCPenneys Back to School
advertising campaign. The campaign was dependent on the retailers current
inventory levels and planned inventory for the upcoming season, as it takes about
six to nine months to manufacture products and get a strategy in place. This
provided a challenge since all current and upcoming inventory was left over from
Johnsons tenure. The pricing plan for b-t-s would be a combination of
manufacturers suggested retail price (MSRP) and everyday low price. MSRP was
dependent on specific brands and their agreements with JCPenney. Private labels
were regularly priced with the potential for sales.37
Johnsons Lasting Legacy
While Johnsons time at JCPenney was mostly disastrous, there were several of his
changes Ullman wanted to keep in place. A JCPenney spokesperson was quoted as
saying, we want to preserve things that instill a sense of newness and not revert
back.37 This included an overall focus on making shopping easier and keeping
stores cleaner. Ullman also kept certain private brands. The St Johns Bay womens
line would be reintroduced in time for Mothers Day. Worthington also was retained,
debuting classic styles and fits. The brand included classic pieces and modern
pieces, giving it day to night versatility.37 Additionally, Worthington would be
getting an in-store shop, creating stronger presence on the sales floor.
No Secret
In May 2013, JCPenney ran an ad called No Secret. The ad was the first creative
issued from Young & Rubicam, the new advertising agency Ullman brought on
board.40 The ad copy stated:
Its no secret. Recently, JCPenney changed. Some changes you liked, and
some you didnt. But what matters with mistakes is what we learn. We
learned a very simple thing: to listen to you. To hear what you need to make
your life more beautiful. Come back to JCPenney. We heard you. Now, wed
love to see you.40

40

http://www.adweek.com/adfreak/jcpenneys-brutally-honest-new-ad-its-no-secret-you-hate-us-149073

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W&M-M-182
No Secret was a bold move for JCPenney. Johnsons continued screw-ups and
failures were rarely acknowledged. Ullman immediately recognized the issues and
issued an apology to customers within the first few months of being back.41
Home Business
On June 6, 2013, JCPenney had the biggest home launch ever.42 Previously, a
revenue giant for JCPenney, home sales had become the worst performing category
during the past seven years. In 2006, home good sales were 21 percent dropping to
12 percent by 2012.42 Ullman stated: Home gives us a chance to grow our business
back to historical levels. The biggest opportunity within the home category was the
window covering market, in which JCPenney had once held a 40 percent domestic
share.37 Home brands for the relaunch included Jonathan Adler, Michael Graves,
Terence Conran, and Martha Stewart. In an effort to attract customers to the new
offerings, the home goods line was launched with a 10-day sale. Ullman recognized
opportunity:
Its quite clear that we owe the customer time to regain her trust, and we
have to speak to her at the same time. We cant be silent, but we cant just
talk about things we cant deliver on. So its a process of getting back in the
business of speaking to her, in tone that she appreciates. We are not
preaching, we are not teaching we are more or less sharing.42
Promising Outlook
The JCPenney Olympics proved successful, with a promising b-t-s outlook. JCPenney
was ranked No. 2 for online b-t-s traffic for the month of July.43 The retailer was only
bested by Wal-Mart, staying ahead of Macys, Amazon, and Target. JCPenney was
ranked No. 3 in b-t-s traffic for the month of August, still ranked ahead of Amazon.44
JCPenney also was the biggest gainer in purchase consideration among the 18 major
retail chains with b-t-s campaigns. Purchase consideration gained 6 percent during
b-t-s reaching 33 percent.43 Ullmans Olympic push showed promising changes and
potential for JCPenney in the days ahead.
Martha Stewart Lawsuit
In December 2011, Johnson signed a 10-year deal with Martha Stewart. JCPenney
also invested $38.5 million in Martha Stewart Living Omnimedia Inc., gaining an
approximate 17 percent stake in the company.45 A month after signing the deal,
41

http://www.businessinsider.com/jcpenneys-new-ad-its-no-secret-2013-5
http://www.cnbc.com/id/100798120
43
http://online.wsj.com/news/articles/SB10001424127887324809004578638360486796632
44
http://www.forbes.com/sites/clareoconnor/2013/08/16/back-to-school-blues-walmart-hits-bum-notewith-crucial-mom-demographic-while-jcpenney-gets-a-boost/
45
http://www.philly.com/philly/business/20130905_ap_42b8075417c24a889275a2601ac09d9b.html?c=r
42

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Macys came forward, claiming exclusive rights to Martha Stewart. In January 2012,
Macys sued both JCPenney and Martha Stewart seeking to stop JCPenney from
selling branded and nonbranded Martha Stewart home goods. The final court
decision was to be issued September 25, 2013, but on September 4, 2013, the New
York Post reported Ullman already had severed ties with Martha Stewart.46 The New
York Post cited unimpressive designs and low sales, forcing items to be discounted
50 percent as the reason behind the breakup between JCPenney and Martha
Stewart.47
Board Turmoil
Flying Blind
In the wake of b-t-s shopping and the Macys lawsuit, the JCPenney board seemed to
be growing restless. Ackman was increasingly frustrated with Ullman as the interim
CEO, calling for a new permanent CEO. On August 9, 2013, Ackman released a letter
to the board voicing his concerns, Mike was hired by this board as an interim CEO.
He has not acted like one.48 Ackmans letter went on, filled with threats to quit the
board and sell shares of his JCPenney stock if the board did not support him ousting
Ullman as CEO and Thomas Engibouse as Board Chair. Engibouse responded to
Ackmans letter, Mr. Ackmans statements are misleading, inaccurate and
counterproductive.48 Perry Capital, a 7.3 percent stakeholder in JCPenney, also
responded to Ackmans letter. Shareholders and creditors have increasingly lost
confidence in the company, as evidenced by the recent significant decline in the
companys stock and bond prices.48
On August 16, 2013, Ackman quit the board. Ten days later, Pershing Square sold
39.1 million shares of JCPenney stock, accounting for its entire stake in the company
and 18 percent of the total outstanding JCPenney shares. On September 13, 2013,
Steven Roth, CEO of Vornado Realty Trust, stepped down from the JCPenney
Board.49 A week after Roth stepped down from the board, Vornado Realty Trust sold
its remaining 13.4 million shares of JCPenney stock.50
August 2013 Outlook
Second quarter 2013 results were in, reflecting an overall loss. There was an
adjusted net loss of $477 million, approximately $2.16 per share. These losses
excluded retirement of debt, restructuring, and management transition costs.
46

http://nypost.com/2013/09/04/jcpenney-finally-shelves-martha-stewart-deal/
http://www.businessweek.com/news/2013-09-13/judge-said-to-seek-answers-on-post-s-j-dot-c-dotpenney-stewart-story
48
http://www.forbes.com/sites/steveschaefer/2013/08/09/ackman-j-c-penney-board-is-flying-blindchairman-needs-to-go/
49
http://www.cnbc.com/id/100963218
50
http://therealdeal.com/blog/2013/09/20/vornado-to-sell-stake-in-jcpenney/
47

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Comparable store sales fell to 11.9 percent, which was seen as an improvement
from 2012 second quarter comparable store sales of 21.7 percent.51 The home
category also showed signs of struggle. Liz Sweeney, head of Merchandising, was
tasked with repositioning the home store in hopes of seizing the opportunity of
home good sales, and regaining market share in a market JCPenney once
dominated.51
Second Quarter Earnings Call
On August 20, 2013, Ullman discussed 2013 second quarter earnings. Despite loses,
Ullman saw overall improvements. Ullman again focused on JCPenneys strategy to
reach core customers, reverting back to the three-stool branding mix. The mix
included bringing in national brands such as Nike and Levis, exclusive and private
label brands, including St Johns Bay and Worthington, that had been somewhat
eliminated. Ullman also emphasized continued attention to the improving website.
E-commerce had been neglected by Johnson, who was solitarily focused on the store
concept.51

Looking to the Future

2013 was a year of dramatic change at JCPenney. Johnson had been eliminated as
CEO, and Ullman was brought back to rebuild the dying brand. Shares of JCPenney
were being quickly sold by large investors, and members of the board were leaving.
Ullman reached out to JCPenneys core customer through an apology ad,
promotional items and sales. Merchandise was refocused to fit the core customers
wants and needs. While sales continued to slump, Ullman faced the impending
holiday season. Would sales, coupons, and in-store promotions be enough to rebuild
the brand? Was Ackman right? Should Ullman be replaced by a permanent CEO?
Should JCPenney cut its losses and look to declaring bankruptcy, or should one of
Americas oldest retailers keep fighting?
In November 2013, J.C. Penney (NYSE: JCP) was dropped from the Standard & Poor's
500 Index after its plummeting value made it more representative of the mid cap
market, Standard & Poors said in a statement. JCP had been an original member of
the S&P 500 since it was constructed in 1957 as an index of 500 stocks chosen for
market size, liquidity, and industry grouping, among other factors.52
In early December 2013, JCPenney said the SEC was looking into its liquidity, debt, and
other financial matters. The struggling retailer disclosed in a regulatory filing that it
51

WWD Despite $586M Loss, Penneys Sees Progress August 2013

http://www.bloomberg.com/news/2013-11-22/j-c-penney-will-be-replaced-by-allegion-in-s-p-500-afterdrop.html

52

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received a letter from the Securities and Exchange Commission requesting information
on its liquidity, cash position, debt, and equity financing, as well as its offering of
common stock announced in September.53
Also in early December, JCP provided a preliminary update on the companys
performance for the fiscal month ending November 30, 2013. During that period,
which includes the important Thanksgiving weekend, the companys comparable
store sales grew 10.1 percent from last year. The company also noted that its ecommerce sales through jcp.com continued to be strong, running well ahead of last
year, consistent with last months trend.
We are pleased with our performance over the Thanksgiving holiday weekend,
particularly in light of the continued spending pressures on consumers. The
combination of our great merchandise and compelling promotions put us in a
position to succeed in a highly competitive environment, and our teams executed
very well, said Myron E. (Mike) Ullman, III, Chief Executive Officer of JCPenney.54

Exhibit I Strategic Resource Management US Department Stores 2012

53

http://finance.yahoo.com/news/j-c-penney-gets-sec-inquiry-regarding-financial-000528745--finance.html
http://www.jcpmediaroom.com/posts/222/J.-C.-PENNEY-COMPANY,-INC.-PROVIDES-HOLIDAYUPDATE

54

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Nordstrom
Macy's
JCP
Target
Kohl's

Nordstrom
Macy's
JCP
Target
Kohl's

-->

#####
#####
31%
#####
#####

36.81%
40.27%
31.31%
29.72%
36.26%

GM%
#####
#####
31%
#####
#####

$
$
$
$
$

8.65
5.22
5.55
9.11
5.14

X
54
35
21
33
45
=
$
465
$
183
$
116
$
303
$
232
X
518
1071
1202
1098
1026
=
$241,024
$196,969
$139,925
$332,225
$238,012

$
$
$
$
$

GMROI
3.18
2.10
1.74
2.71
1.86

$
$
$
$
$

GMROF
171.21
74.04
36.43
89.94
84.11

$
$
$
$
$

GMROL
88,729
79,311
43,814
98,762
86,296

$
$
$
$
$

2.64
1.84
2.18
2.33
1.60

$
$
$
$
$

142.15
65.17
45.25
77.33
72.25

$73,668
$69,813
$54,428
$84,917
$74,123

$
$
$
$
$

NMROI
0.54
0.26
(0.42)
0.37
0.26

$
$
$
$
$

NMROF
29.06
8.87
(8.82)
12.61
11.86

NMROL
$ 15,061
$ 9,497
$ (10,614)
$ 13,846
$ 12,173

Exhibit II

25

W&M-M-182
Strategic Profit Model for US Department Stores 2012
ROS
ATO
ROA
LEV
ROE
Nordstrom
6.05%
1.50
9.09%
4.23
38.42%
Macy's
4.82%
1.32
6.36%
3.47
22.06%
JC Penney
-7.59%
1.33
-10.07% 3.08
-31.06%
Target
4.09%
1.52
6.23%
2.91
18.11%
Kohl's
5.11%
1.39
7.09%
2.30
16.30%

26

W&M-M-182
Exhibit III - JCPenney Balance Sheet
Assets
Cash and Equivalents
Restrictable Cash
Marketable Securities
Accounts Receivable
Loans Receivable
Other Receivables
Receivables
Inventories
Inventories, Raw Materials
Inventories, Work in Progress
Inventories, Purchased Components
Inventories, Finished Goods
Inventories,Other
Inventories, Adjustments & Allowances
Prepaid Expenses
Current Deferred Income Taxes
Other Current Assets
Total Current Assets

Jan-13
$121.00
$809.00
$306.00
$306.00
$2,341.00
$2,341.00
$249.00
$3,826.00

Jan-12
$175.00
$1,332.00
$413.00
$413.00
$2,916.00
$2,916.00
$245.00
$5,081.00

Jan-11
$169.00
$2,453.00
$334.00
$334.00
$3,213.00
$3,213.00
$201.00
$6,370.00

Jan-10
$163.00
$2,848.00
$395.00
$395.00
$3,024.00
$3,024.00
$222.00
$6,652.00

in millions of dollars
Jan-09
Jan-08
$2,352.00
$119.00
$2,352.00
$430.00
$352.00
$352.00
$430.00
$3,259.00
$3,641.00
$3,259.00
$3,641.00
-$2.00
-$1.00
$257.00
$209.00
$6,220.00
$6,751.00

Land and Improvements

Buildings and Improvements
Machinary, Furniture and Equipment
Construction in Progress
Fixed Assets, Other
Fixed Assets, Total
Gross Fixed Assets
Accumulated Depreciation
Net Fixed Assets
Intangibles
Cost in Excess
Non-Current Deferred Income Taxes
Other Non-Current Assets
Total Non-Current Assets

$310.00
$5,791.00
$2,132.00
$8,233.00
$8,233.00
-$2,880.00
$5,353.00
$745.00
$6,098.00

$312.00
$5,656.00
$2,173.00
$8,141.00
$8,141.00
-$2,965.00
$5,176.00
$1,167.00
$6,343.00

$315.00
$5,499.00
$2,271.00
$8,085.00
$8,085.00
-$2,854.00
$5,231.00
$1,467.00
$6,698.00

$308.00
$5,394.00
$2,356.00
$8,058.00
$8,058.00
-$2,701.00
$5,357.00
$572.00
$5,929.00

$308.00
$5,134.00
$2,364.00
$7,806.00
$7,806.00
-$2,439.00
$5,367.00
$424.00
$5,791.00

$303.00
$4,634.00
$2,241.00
$7,178.00
$7,178.00
-$2,219.00
$4,959.00
$107.00
$2,492.00
$7,558.00

Total Assets

$9,924.00

$11,424.00

$13,068.00

$12,581.00

$12,011.00

$14,309.00

Jan-11

Jan-10

Jan-09

Jan-08

Liabillities

Jan-13

Jan-12

$ 1,162.00
$
26.00
$ 1,395.00
$ 2,583.00

$ 1,022.00
$
231.00
$ 1,038.00
$
465.00
$ 2,756.00

113.00
$ 1,057.00
$ 1,170.00

$ 2,856.00
$
393.00
$ 3,249.00

$ 1,194.00
$ 1,257.00
$
343.00
$ 2,794.00

$ 1,472.00
$
203.00
$ 1,320.00
$
343.00
$ 3,338.00

Total Non-Current Liabilities

$ 2,956.00
$
388.00
$
683.00
$ 4,027.00

$ 2,871.00
$
888.00
$
899.00
$ 4,658.00

$ 3,099.00
$ 1,192.00
$
670.00
$ 4,961.00

$ 2,999.00
$
817.00
$
738.00
$ 4,554.00

$ 3,505.00
$
599.00
$
958.00
$ 5,062.00

$ 3,505.00
$ 1,463.00
$
691.00
$ 5,659.00

Total Liabilities

$ 6,610.00

$ 7,414.00

$ 6,131.00

$ 7,803.00

$ 7,856.00

$ 8,997.00

Preferred Shareholder's Equity

Common Shareholder's Equity
Common Per
Additional Paid in Capital
Cumulative Translation Adjustments
Retained Earnings
Treasury Stock
Other Equity Adjustments

$ 3,171.00
$
110.00
$ 3,799.00
$
738.00
$ (1,118.00)

$ 4,010.00
$
108.00
$ 3,699.00
$ 1,412.00
$ (1,209.00)

$ 5,460.00
$
118.00
$ 3,925.00
$ 2,222.00
$ (805.00)

$ 4,778.00
$
118.00
$ 3,867.00
$ 2,023.00
$ (1,230.00)

$ 4,155.00
$
111.00
$ 3,499.00
$ 1,959.00
$ (1,414.00)

$ 5,312.00
$
111.00
$ 3,453.00
$ 1,540.00
$
208.00

Total Equity

$ 3,171.00

$ 4,010.00

$ 5,460.00

$ 4,778.00

$ 4,155.00

$ 5,312.00

$9,781.00

$11,424.00

$11,591.00

$12,581.00

$12,011.00

$14,309.00

Accounts Payable
Short Term Debt
Notes Payable
Accrued Expenses
Accrued Liabilities
Deferred Revenues
Current Deferred Income Taxes
Other Current Liabilities
Total Current Liabilities
Long Term Debt
Deferred Income Tax
Other Non-Current Liabilities
Minority Interest
Capital Lesse Obligations
Preferred Securities of Subsidiary Trust
Preferred Equity Outside Shareholders' Equity

Total Liabilities & Shareholder's Equity

27

W&M-M-182
Exhibit IV - JCPenney Income Statement
Income
Operating Revenue

Jan-13
$ 12,985.00

Jan-12
$ 17,260.00

Jan-11
$ 17,759.00

Jan-10
$ 17,556.00

in millions of dollars
Jan-09
Jan-08
$ 18,486.00 $ 19,860.00

Total Revenue

$ 12,985.00

$ 17,260.00

$ 17,759.00

$ 17,556.00

$ 18,486.00

$ 19,860.00

Adjustments to Revenue
Cost of Revenue

$ (8,919.00) $ (11,042.00) $ (10,799.00) $ (10,646.00) $ (11,571.00) $ (12,189.00)

Cost of Sales with Depreciation

8,919.00

$ 11,042.00

$ 10,799.00

$ 10,646.00

$ 11,571.00

$ 12,189.00

Gross Margin

4,066.00

6,218.00

6,960.00

6,910.00

6,915.00

7,671.00

Gross Operating Profit

4,066.00

6,218.00

6,960.00

6,910.00

6,915.00

7,671.00

Selling/General/Admin Expense

$ (4,535.00) $ (5,251.00) $ (5,585.00) $ (5,752.00) $ (5,336.00) $ (5,403.00)

Research & Development

Advertising

EBITDA (Operating Income before Depreciation)

(469.00) $

Depreciation & Amoritization

(543.00) $

Depreciation, Unreconciled

543.00

967.00

(518.00) $
518.00

1,375.00

(511.00) $
511.00

1,158.00

(495.00) $
495.00

1,579.00

(469.00) $
469.00

Amoritization

Amoritization of Intangibles

2,268.00
(426.00)
426.00
-

Operating Income

$ (1,012.00) $

449.00

864.00

663.00

1,110.00

1,842.00

Operating Profit After Depreciation

$ (1,012.00) $

449.00

864.00

663.00

1,110.00

1,842.00

Interest Income

Earnings from Equity Interest

Other Income, Net

(20.00)

Income Acquired in Process R&D

(32.00)

Income, Restructuring and M&A

Other Special Charges

Total Income Before Interest Expense (EBIT)

(451.00) $
-

$ (1,012.00) $

(2.00) $

Interest Expense

(226.00) $

(227.00) $

Income Before Tax

$ (1,238.00) $

(229.00) $

Income Taxes

551.00

77.00

812.00

(231.00) $
581.00

(203.00) $

663.00

(260.00) $
403.00

(154.00) $

910.00

Preferred Securities of Subsidiary Trust

581.00

403.00

Net Income from Cotinuing Operations

$ (1,925.00) $

(152.00) $

Net Income from Discontinued Operations

Net Income from Total Operations

$ (1,925.00) $

Normalized Income

Extraordinary Income/Loss
Special Income/Charges

$ (1,215.00) $

Income from Cum. Effect of Acct Change

Income from Tax Loss Carryforward

Net Income Available for Common

(710.00) $

Total Net Income

(12.00)
1,876.00
(153.00)
1,723.00
(618.00)
-

910.00

1,723.00
1,105.00

378.00

249.00

567.00

11.00

2.00

5.00

6.00

(152.00) $

389.00

251.00

572.00

1,111.00

410.00

249.00

567.00

1,117.00

299.00

(451.00) $
-

(985.00) $

(152.00) $

(985.00) $

(152.00) $

Other Gains

(343.00) $

46.00
-

(225.00) $

(229.00) $

$
-

1,135.00

$ (1,238.00) $

25.00

Minority Interest
Other Special Charges

(32.00)

378.00

249.00

251.00

389.00

567.00

572.00

(12.00)
-

1,105.00

1,111.00

28

W&M-M-182
Exhibit V - JCPenney Statement of Cash Flows
Cash Flow
Jan-12

Jan-13
Net Income

Jan-11

$ (985.00) $ (152.00) $ 389.00

(Income) from discontinued operations

121.00

314.00

24.00

Asset impairment & other charges

117.00

67.00

8.00

Net gain on sale or redemption of non operating assets

$ (397.00) $

Depreciation & amoritization

543.00

Benefit Plans

272.00

Pension contribution

50.00

(6.00) $
518.00

$ 572.00

(5.00) $

48.00

29.00

(8.00)

$ 469.00

55.00

$ 197.00

$ (392.00) $ 276.00

46.00

$
$

defered taxes

$ (467.00) $ (153.00) $ 126.00

(10.00) $

(2.00) $

5.00
-

(6.00)

$ 495.00

Excess Tax Benefits from stock based compensation

$ 1,111.00

(2.00) $

$ 511.00

Stock based compensation

(12.00) $

$ 251.00

(11.00) $

Restructuring & Management transition

in millions of dollars
Jan-09
Jan-08

Jan-10

(10.00) $

$ 201.00

426.00
(12.00)

$ (155.00)

53.00

(2.00) $

43.00

53.00

9.00

76.00

$ 169.00

37.00

45.00

Change in cash from:

Inventory

Prepaid expenses & other assets

Merchandise A/P

140.00

$ (111.00) $

Current Income Taxes

117.00

15.00

Accrue expenses & other

(79.00) $

37.00

(10.00) $

850.00

526.00

Cash from Operating Activities

Sale of Property, Plant, Equipment
Sale of Long Term Investments

(5.00) $

Sale of Short Term Investments

Purchase of Property, Plant, Equipment

575.00

297.00

$ (189.00) $ 235.00

(67.00) $

68.00

$ (241.00)

36.00

51.00

(93.00) $

32.00

$ (278.00) $

106.00

33.00

(57.00) $

$ 1,573.00

25.00

(36.00) $

(66.00)

(13.00) $

(61.00)

$ 1,558.00

$ 1,249.00

14.00

13.00
-

26.00

$ (810.00) $ (634.00) $ (499.00) $ (600.00) $ (969.00) $ (1,243.00)

Acquisitions

Purchase of Long Term Investments

(9.00) $ (268.00)
-

(36.00)

13.00

Purchase of Short Term Investments

Other Investment Changes, Net

Cash from Discontinued Investing Activities

Cash from Investing Activities

(81.00) $ 142.00

$ 592.00

$ 382.00

27.00

(25.00)

$ (293.00) $ (870.00) $ (485.00) $ (587.00) $ (956.00) $ (1,242.00)

Issuance of Debt

$ 392.00

68.00

$ (250.00)

$ (693.00) $ (113.00) $ (203.00) $ (746.00)

Issuance of Capital Stock

Repayment of Debt
Repurchase of Capital Stock

83.00

8.00

4.00

4.00
-

980.00

45.00

$ (400.00)

Payment of Cash Dividends

(86.00) $ (178.00) $ (189.00) $ (183.00) $ (178.00) $ (174.00)

Other Financing Charges, Net

(21.00) $ (955.00) $

Cash from Financing Activities

$ (274.00) $ (1,065.00) $ (496.00) $ (327.00) $ (380.00) $ (286.00)

Net Change in Cash

$ (577.00) $ (1,115.00) $ (389.00) $ 659.00

$ (180.00) $ (276.00)

Cash at Beginning of Year

$ 1,507.00

$ 2,622.00

$ 3,011.00

$ 2,352.00

$ 2,532.00

$ 2,747.00

Cash at End of Period

$ 1,507.00

$ 2,622.00

$ 3,011.00

$ 2,352.00

$ 2,471.00

930.00

(14.00) $

(35.00) $

(3.00) $

9.00

29