From Near Death, JC Penney Is Ready For Take Off

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\"\"Marvin Ellison delivered. In his first year as the CEO of JC Penney he has achieved enough positive growth measures to give credence to his three-year turnaround plan. Formerly EVP of stores at Home Depot, Ellison was brought in by CEO Mike Ullman in late 2014 as President and CEO-Designee, (to replace Ullman as CEO in August of 2015). Ellison’s charge was to put JC Penney back on a growth trajectory. Ullman, who had been called back as CEO in April of 2013 to save JC Penney from plummeting to its death, had stabilized the business enough to provide a runway for take-off. And Ellison will soon declare, “wheels up.”

The 2015 year-end numbers support the fact that his commitment to returning to growth is gaining speed. And it’s an even greater accomplishment in an industry that is in total upheaval, and an economy that’s stagnant. It’s also impressive in contrast to the weak numbers coming out of Macy’s, Kohl’s, Dillard’s, the Gap, and the disaster called Sears, which isn’t even worth mentioning. In fact, since the world isn’t creating enough demand to consume the glut of supply, it’s logical to assume that JC Penney’s growth came from stealing competitors’ share of wallet.

By the Numbers

JC Penney delivered net sales of $12.6 billion which was a 3.0 percent increase over $12.3 billion in 2014. And, they are on record stating they will reach net sales of $14.5 billion by 2017, Ellison’s third turnaround year. For context, six years ago, prior to near fatal collapse of the business under Ron Johnson’s brief tenure, annual sales were about $18 billion. Penney believes $2 billion of the new revenues will include $750 million in the resurgence of the home category, which had the largest decline in market share, sales per square foot and sales during the Johnson era.

A key driver of the positive sales results for 2015 was the 4.5 percent increase in comp store sales; a significant achievement. Ellison has stated that JC Penney had 87 million active customers in 2011 and the same number today. The sales numbers indicate that on a per customer basis, they are shopping and/or spending less. In 2014, average annual sales per square foot were about $155, which was 33 percent below their 2006 peak year, and well below their competitors at around $225 – $250 per square foot. I must assume that Ellison’s team is analyzing the current count to determine the percentage of returning or new customers, the difference in demographic profiles vs. the 87 million in 2011, and what those shifts, if any, are telling them about turnaround strategy. Ellison stated that, “The reason the volume is not the same is that the businesses impaired (under Johnson) have not been [fully] restored.” One of Ellison’s three priority strategies is to increase revenue per customer as well as overall traffic. And the positive “comps” they have reported mean they are gaining traction. They’re projecting a continuance of this growth of a 3 – 4 percent increase for 2016.

Note: I want to emphasize the importance of understanding the profile of those “87 million active customers.” I was quoted in the March issue of Fortune magazine that JC Penney and its competitive peers are “fighting it out amongst themselves for a dwindling share of market.” So, an understanding of the demographic make-up of the 87 million will help guide Ellison in determining whether he’s gaining sales from new customers or getting existing customers to buy more and/or more often. This key data will help him develop strategy accordingly.

Gross margin increased 120 basis points to 36.0 percent from 34.8 percent in 2014, while SG&A decreased $218 million or 270 basis points over the prior year. Ellison declared “low cost retail wins” at a Goldman Sachs retail conference last September. He talked about driving supply chain efficiencies by investing in the “science” of retailing, creating a more efficient and effective supply chain, using analytics for sharper pricing strategies, lowering advertising costs and focusing on deeper penetration, and a reducing the bureaucracy. However, his focus on cost reductions is a “reduce to reinvest” strategy to increase investment in marketing, omnichannel and technology for growth. Ellison is highly experienced in all of the above tactics from his tenure at Home Depot.

Adjusted EBITDA was $715 million, a $435 million or 155 percent improvement from 2014, and it beat the forecast of $620 million. For 2016, Penney upped its adjusted earnings forecast to $1 billion vs. its prior forecast of $900 million. And its three-year turnaround goal for 2017 is to reach $1.2 billion in EBITDA, which would enable Penney to service its debt, now at about $4.5 billion, and pay for expenses. Another source of debt reduction might come from the possible sale/leaseback of its Plano headquarters.

Its adjusted net loss for 2015 improved by $463 million to $315 million, or $(1.03) per share. Free cash flow was positive $131 million, an increase of over $74 million or 130 percent from 2014. For the full year, liquidity improved $900 million, of which $500 million was used to pay down debt during the fourth quarter. At year-end, liquidity was $2.5 billion compared to $2.1 billion last year.

By the Strategies

The 2015 numbers were achieved through the implementation of Ellison’s three priority strategies for accelerating growth:

  1. Adding to, and increasing the support for private brands (which account for over 50 percent of sales and providing higher margins), to offset lower margins for online sales. Accelerating the building of a “world class” omnichannel (which had fallen way behind competitors under the Johnson tenure) and adding technology to enhance the shopping experience.
  2. Increasing customer “traffic” and revenue per customer.

By the Leadership

Having a vision and focusing on the strategies to achieve them is one thing. Implementing them is something else, as was so harshly revealed during Johnson’s reign. To implement strategy on the ground and in the trenches, a leader needs a culture of happy, loyal believers coupled with energized, skilled managers and tacticians who are willing to go extra miles to achieve the goal.

According to several sources, Ellison achieved this all-important leadership dynamic as the President of Home Depot stores (about 2000 in number). During his 12-year tenure, he prevailed through its near collapse under then-CEO Robert Nardelli who decimated the very skilled and knowledgeable sales staff that was one of Home Depot’s key competitive advantages. Mike Ullman has said that one of the reasons for his choice of Ellison was the fact that Marvin came out the other side of Home Depot’s turnaround with a win for investors, employees and customers.

The Fortune article reported that former CEO of Home Depot, Frank Blake, credits Ellison for fixing Home Depot’s “dismal customer-satisfaction ratings and turning the company from an e-commerce laggard into a leader.” He also praised Ellison’s leadership skills in “galvanizing” the workers. Blake cited by example Ellison’s production of an internal video showcasing customer-service success stories. Blake said, “They provided a ‘Wow, that’s amazing’ element to work so that people could see how impactful their work could be…. It makes the associates stars.”

The head of merchandise operations at Home Depot during Ellison’s tenure, Steven Skinner, said in an interview, “You’re not going to be hearing about any outbursts from Marvin. People like working for him. He operates under a tent; he’s inclusive. That doesn’t mean he won’t make a decision. He will, and then he will own it. And Ellison isn’t afraid to share credit, not like many leaders today who like to hog it.” So, Ellison was ready to bring his excellent leadership skills to JC Penney, which would be additive to the work that Mike Ullman had been doing to heal the culture and return it to the proud team it had once been.

Since his arrival, Ellison has continuously stressed the importance and contributions of the Penney employees. Perhaps part of this respect is a result of his own experience working at a convenience store while in college, and then during his 15-year stint at Target. He told a group of analysts that he had visited 100 Penney stores during his first 15 months. He went on to say that he is convinced the “Penney culture is the backbone” of the company.

Ellison quotes over the past few years lend further credibility to his leadership skills:

  • “I’m trying to understand the culture and customer. In retail, understanding those two things is essential.”
  • “…listening to people about what we need to do;”
  • “There will be change, but not for the sake of change.”
  • “There’s nothing more instructive than asking store employees for their opinions. I have no problem doing it.”

And to a group of about 1000 top Penney store managers assembled upon his arrival he said, “I just left a great job. If I didn’t think we would succeed, I wouldn’t be here. The fact that you persevered during these tough times gives me confidence.”

Another observation of his leadership skills and how he has embraced and energized the culture comes from a highly respected industry analyst, Jan Rogers Kniffen, CEO J Rogers Kniffen WWE. Jan said, “I am a big fan of Marvin. I never go into a store that the store manager does not tell me 1) Marvin has been here and 2) Marvin is the greatest thing since sliced bread.”

About the business and some early wins for Ellison, Jan went on to say, “Personally, I think that Penney has the best looking mall anchor stores today. I definitely think that they are taking share back, especially from Macy’s. It was inevitable if they got their customer back. And going cash flow positive ‘a year early’ was a big deal in my view.”

By the Tactics

Private Brands

Ellison is finishing what Ullman started in the turnaround. He is revitalizing and placing a marketing priority on Penney’s 20-plus private brands, including the powerful Arizona, Liz Claiborne and St. John’s Bay brands, each delivering annual revenues of over a billion dollars. Ron Johnson had eliminated St. John’s Bay along with about 13 other private brands to provide space for outside brands that he believed were better aligned with the new younger customers for which he was repositioning Penney. In addition to returning St. John’s Bay, a few other major brands were reinstated, including Cooks kitchenware, JCPenney Home, Ambrielle lingerie and a.n.a. women’s apparel.

Private brands account for roughly 50 percent of Penney’s business and Ellison plans to accelerate its growth. It’s a business that provides both better controls over costs, pricing, markdowns, inventory distribution as well as higher profits, (4 to 5 percent higher than national brands). With over 1000 employees devoted to the private business, designing over 8000 different products a year, Penney has built in leverage for expanding this branding business and gaining a significant competitive advantage. Ellison also mentioned at the 2015 Goldman Sachs conference that they would be developing new initiatives to attract millennial customers. One such move is the launch of a new private brand of trendy women’s wear called Belle+Sky. With faster turnaround cycles, the brand is intended to compete with brands like H&M and Forever 21. Belle+Sky is currently in 500 stores.

Michael Strahan, of New York Giant’s football fame, was launched as a brand of suit separates, sport coats, dress shirts, neckwear, belts and accessories last fall. This line along with the addition of branded activewear, will appear in 500 stores prior to Father’s Day.

In my opinion, Ellison’s commitment to an aggressive private branding strategy is very smart. However, like the Strahan example, he is well advised to target the acquisition of brands that have existing national awareness and strength, as opposed to building brands from scratch, which in this world of unlimited and instantaneous choice, requires a nuclear explosion to break through.

This should have been a lesson learned from Penney’s multi-million dollar disastrous launch of American Living, a partnership deal with Ralph Lauren that closed down after they did not renew the five-year contract. The Robin Report predicted its failure out of the starting gate, based on the fact that Ralph Lauren’s name was nowhere to be seen. Consumers had no way of linking American Living to Lauren’s brand, and the price-value relationship did not resonate with Penney’s customers.

Omnichannel and Technology

Ellison acknowledged the fact that JC Penney had fallen way behind its competitive peers in integrating a seamless store and Internet omnichannel platform, although he stated that being a “second mover” might be to their advantage. Alexa Traffic Rank, a firm tracking online activity, finds that even though Penney is behind Macy’s and Kohl’s in online sales ranking, its growth trajectory is now equivalent. And Ellison’s omnichannel lessons learned during his 12 prior years presiding over those 2000 stores at Home Depot should also boost Penney’s comeback.

Ellison had this to say in a recent WWD article: “Finding a seamless connection between dot-com to store, mobile to desktop is critically important.” And, Penney is conducting a pilot on same-day delivery of goods ordered online and delivered from stores. Ellison said, “We are making capital investments in digitalizing the network.”

Another initial move made by Ellison is regarding omnichannel compensation issues for associates. He has given the store leaders a new title of general manager, so that each store will get credit for online sales made in surrounding ZIP codes. This will encourage the managers to take ownership of online sales, thus, focusing their customer service efforts equally in-store and online.

Ellison is looking to add new and more sophisticated analytics systems for greater supply chain efficiencies and effectiveness to better connect with consumers, including the localization/personalization of merchandise and services. One major area of focus will be in rebuilding their database on the Latino segment, which Johnson had arbitrarily discarded, believing his targeted young customer base was homogenous.

 Increasing Customer “Traffic” and Revenue Per Customer

Regarding Penney’s core mid-tier consumers with annual incomes of $60,000, they spent 5.6 percent more in 2015 than the prior year. Ellison said in a previous interview, “that gives us some confidence about our mid-tier consumer.”

Another major initiative planned to boost conversion rates and sales is Ellison’s program to increase associates’ direct connection and activity with shoppers, thus increasing customer service. As mentioned above, he was highly successful at making this happen at Home Depot, where he reversed the time associates spent on tasks to “customer-facing” efforts, from 60 percent tasks, 40 percent customer-facing to exactly the opposite.

He is pushing a strategy of “new marketing” as he described it at the Conference, modernizing it with more social media and digital advertising. They are working on a new credit card loyalty program. Penney’s experience has been that credit card customers spend two and one half times more than its average customer.

Penney just launched a new marketing campaign, “Get Your Penney’s Worth,” initially for the Arizona private brand, which will sell select Arizona items for a penny.

Sephora, which has been an incredible revenue (annual sales per square foot of about $600), and profit driver since Ullman brought the brand in over a decade ago, generating three to four times the sales of the rest of the store, will be aggressively expanded. Twenty were opened in 2015 and 60 more are planned this year to bring the total to 578 stores. And about Sephora’s website on, Ellison said, “It has tons of future possibilities.”

Furthermore, Penney will be upgrading its “center core” business around the Sephora shops to lure customers to buy more updated accessories, intimate apparel, handbags, jewelry and shoes. New Sunglass shops are also being created. More Disney shops will be built to bring back some of the kids’ business that was eroded under Johnson.

And to recover the all-important home business, which accounted for roughly 21 percent of sales in 2007, falling to 11 percent under Johnson’s attempt to modernize it, Ellison relaunched a modern version of the former very productive home catalogue. As previously mentioned, Cooks kitchenware and the JCPenney Home goods brands were reinstalled. And new lines from Epicurious and Eva Longoria have been added to the home department.

Finally, Penney has a pilot program in 22 stores selling kitchen and laundry appliances, a business Ellison has years of experience with, considering Home Depot is the third largest seller of appliances. And, while Sears is the second largest, including its famous brand, Kenmore, Ellison just might have his eye on stealing traffic and business from the many mall locations Sears and Penney share and ones where Sears may very well go out of business in the not too distant future.

Penney also expects to increase store traffic through the JC Penney beauty salons. Through collaboration with the editors of InStyle, Penney is rebranding 850 salons to be called “The Salon by InStyle.” Better stylists are also being recruited. According to JC Penney, beauty customers tend to visit the store eight times a year and spend twice as much per visit than the average customer.

The Epilogue?

I believe JC Penney is on a winning trajectory considering Marvin Ellison’s record as a great leader at Home Depot. Add to that his new record which is quickly becoming apparent at JC Penney. And then add his very well thought out, and focused strategies, which, according to the first year numbers, are being tactically well executed. Add all this up and then, perhaps, James Cash Penney can finally RIP.



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