CHARLESTON, W.Va. -- J.C. Penney Co. made a radical break with tradition by hiring Silicon Valley wunderkind Ron Johnson as chief executive officer. With Johnson gone, the chain may have to pursue even more radical options, such as selling itself.
After suffering a 25 percent annual sales decline, J.C. Penney on Monday ousted Johnson, 54, and replaced him with his predecessor, Myron Ullman, 66. Investors, who pushed the shares up 13 percent on news that Johnson was out, abruptly sold after learning Ullman was the new CEO.
Ullman faces several tough choices. He'll have to decide whether to continue Johnson's strategy of turning the chain into a collection of boutiques or return to a more traditional department-store model. Ullman will also have to consider whether to sell the company or break it up, said Dave Larcker, a corporate governance professor at the Stanford Graduate School of Business in Stanford, Calif.
"The board is going to have to get much more involved in the strategy of the company," Larcker said. "People may attack the board, as well, for how this happened. This was a high- profile hire. For it to unravel this quickly is kind of terrifying."
The Plano, Texas-based chain was so damaged under Johnson that Ullman will struggle to turn it around. On Feb. 27, J.C. Penney reported annual revenue dropped to $13 billion, the lowest since at least 1987. Johnson alienated the company's core customers by doing away with sales and promotions and only recently began trying to win them back by putting discounts front and center again.
"There is a tremendous amount of cleaning up and rebuilding that has to take place," Howard Gross, managing director of the retail and fashion practice at executive search firm Boyden in New York, said in a telephone interview.
Johnson's appointment as CEO in November 2011 was greeted with much anticipation by analysts and investors. After all, he had helped Steve Jobs prove doubters wrong by turning Apple's stores into a success with unrivaled sales per square foot. Johnson was expected to work similar feats at J.C. Penney, which was struggling for relevance. The shares surged 17 percent on June 14, 2011, the day Johnson's hiring was announced, for the biggest gain in more than a decade.
Bill Ackman, whose Pershing Square Capital Management is the company's largest investor, handpicked Johnson and championed his re-invention plans. Before Johnson unveiled his turnaround strategy in January 2012, Ackman vowed it would be the most important day for retailing in 25 years. At first investors were on board, and the shares routinely surged whenever Johnson spoke publicly.
Johnson made a series of splashy announcements. One of the first was that J.C. Penney was taking a 17 percent stake in Martha Stewart Living Omnimedia with the aim of selling the lifestyle doyenne's products. The bet later soured when Macy's, which already had an exclusive deal to sell Stewart- branded merchandise, sued J.C. Penney. The two sides continued to battle in a New York court Monday.
Another move that would come back to bite Johnson: the decision to institute everyday low prices and get rid of the discounts and promotions that American shoppers have come to expect. A series of TV commercials, some starring Ellen Degeneres, sold J.C. Penney as a hip destination rather than focusing on specific merchandise and deals, deals, deals.
Johnson's strategy of eliminating promotions was doomed from the start, said Allen Questrom, a former J.C. Penney CEO who retired from the retailer in 2004.
"I would have told him, 'You can't take a middle-market store in the middle of a recession and not have sales,' " Questrom said last month. "It's never worked before. If you want to do that, you have to do it over a long period of time and certainly not in a recession, when people want value more than ever."