BUSINESS

JC Penney names Home Depot executive next CEO; New leader faces challenges

10/13/2014 08:57 EDT | Updated 12/13/2014 05:59 EST
NEW YORK, N.Y. - J.C. Penney's newly tapped CEO has a big challenge ahead of him: The troubled chain is showing signs of improvement after racking up billions in losses, but still hasn't figured out how to get shoppers back into its department stores.

Penney said Monday that Marvin Ellison, a 30-year retail veteran and executive vice-president of stores at Home Depot, will become its CEO next August. Ellison will be the first black CEO in the company's 112-year history.

Ellison succeeds Mike Ullman, a former Penney CEO who came out of retirement last year to take the helm again. His mission was to stabilize the business following the ouster of Ron Johnson, a former Apple executive who tried unsuccessfully to reinvent the beleaguered chain by getting rid of sales and some basic merchandise. That led to billions in losses of profit and sales.

The company's profit losses — which have amounted to a total of $3.16 billion in 11 of the last 12 quarters — have slowed significantly under Ullman's leadership. But the company is still in the red, and analysts say Ellison's challenge will be to fix the fundamental problems that caused Penney to lose customers in the first place.

They say the retailer doesn't have merchandise that sets it apart from rivals like Macy's and H&M. Its stores are drab and unexciting. And its website doesn't offer the selection and services that shoppers like.

"While bringing in a credible new CEO has some benefits, J.C. Penney's customers are leaving the store," said Michael Binetti, an analyst at UBS in a note to clients Monday.

THE TRANSITION

Penney is looking to Ellison, 49, to help right the ship. Ellison spent 12 years with Home Depot and before that, 15 years at Target. He has expertise in store operations and logistics, but lacks experience in fashion.

Ellison, who also will join Penney's board, will become president in November, before taking the CEO title next year. At that time, Mike Ullman will become executive chairman of the board, serving for a year.

It's rare for a management transition to last that long, but Walter Loeb, a New York-based retail consultant, said the time is needed. "I think (Ellison) is an excellent leader ... but he needs time to learn the fashion business," he said.

Ullman said in a statement that he looks forward to working closely with Ellison and the rest of the team in the coming months to ensure a "smooth transition and a successful future for J.C. Penney."

Penney said Ullman and Ellison weren't available for interviews on Monday.

WHAT WENT WRONG

Ullman was CEO for seven years before Johnson was brought in to modernize the stores. But customers didn't like Johnson's changes, and Johnson left after 17 months. Ullman, who was brought back in April 2013, began restoring sales and basic merchandise that the company ditched under Johnson's tenure.

Under Ullman, Penney has recorded three straight quarters of increases in sales at established stores. Still, those increases haven't outweighed last year's drastic declines.

In the latest fiscal year that ended Feb. 1, Penney recorded a loss of $1.39 billion, while revenue dropped 8.7 per cent to $11.86 billion. And last week, Penney warned that its sales at stores open at least a year last month were weaker than expected. It also cut its outlook for sales at established stores for the current quarter.

FIXING THE PROBLEM

The CEO announcement comes after Penney last week unveiled a strategy that it said would boost sales by $2.55 billion over next three years. It entails improving the productivity of its stores' home department, expanding e-commerce and sprucing up areas like jewelry, shoes and handbags.

Penney sees the opportunity for an additional $1 billion in sales from continued market-share growth. That would bring the chain's annual revenue to $14.5 billion by fiscal 2017. Still, that's well below the $17.3 billion it generated before sales went into a freefall under Johnson.

The company also has focused on cutting costs. Earlier this year, it cut 2,000 jobs and shuttered 33 stores. But the company didn't announce any more store closures last week as analysts had expected.

On news of the CEO appointment, J.C. Penney's shares closed up 3 cents, or less than a per cent, to $7.09, on Monday. That's after having risen more than 3 per cent earlier in the day.

J.C. Penney shares have lost more than 80 per cent of their value since early 2012 when investor enthusiasm was high over Johnson's turnaround strategy.

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