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  • Warren Shoulberg

Now What Does JCP Do?

With Ron Johnson gone and Mike Ullman...

MIKE ULLMANMIKE ULLMAN
The irony that this lyric is from a song called "Won't Get Fooled Again," will probably not be lost on most people in the home textiles industry who now have to deal with yet another entirely different merchandising scenario at JC Penney following Ron Johnson's departure last week and the return of former ceo Mike Ullman.
     The dramatic change in Plano was not necessarily a surprise to those in the trade, even if the abruptness of the change and the choice of Ullman probably caught many off-guard.
     Ullman, a longtime retail veteran with a resume including stores from one end of the mall to the other, has a strong reputation as an operations executive, although some question his merchandising savvy.
     He'll need expertise in both areas to stop the bleeding - sales, morale and legal - at the company and try to salvage what is increasingly a tenuous situation that has the potential to end very badly if things don't break well.
     While Ullman is not giving any specifics at this early stage - it appears he was only offered his old job back just days before Johnson's dismissal - there are a number of plausible strategies he can pursue to return at least some of the shine to what is a very badly tarnished Penney business model.
     Here are the some of the most likely paths in which he can take the company:
     Full-tilt Penney: When Johnson unveiled his new game plan 15 months ago, he pointed out Penney had some 500-plus individual sales and promotional events and vehicles the year before. That was Ullman's plan then, a strategy clearly targeted to compete with both Kohl's and Macy's. Penney could return to that tact relatively quickly, and while the volume of promotions might take a while to ramp up, it is entirely likely that high-low pricing will be back as soon as the company can
RON JOHNSONRON JOHNSON
re-order a couple of thousand pricing guns to retag the merchandise.
     This will be good for home since it is historically a category driven by sales and one that fares poorly in everyday-low pricing scenarios.
     JCP Light: Whatever strategy Ullman takes he must at least initially do it with the hand he has been dealt. That means the product that is already in the sourcing pipeline is pretty much set and it will be first quarter of 2014 at the earliest that he can have any significant input on new product.
     So, under this plan, any of the shops already in process that were the backbone of the Johnson plan will continue to roll out, but no new ones will be ordered and the rest of the store will return to a classification-ordered floor plan.
     In home, this means Jonathan Adler, Conran and Michael Graves shops - largely set to be completed within the next 30 days - will arrive as planned, but categories like towels, sheets and curtains will remain classification-driven. The shops, however, will probably disappear as quickly as store workers can dismantle them.
Mike & Ron's Excellent Adventure: Under this possibility, the best shops will be kept and there may even be a few new ones developed. In apparel, if brands like Joe Fresh and Levi continue to outperform the store in general they will remain front and center. Too much has already been invested in these properties to tear them down and Ullman did see the value of some shop-in-shops as it was on his watch that Penney brought in Sephora and Mango.
     In home, it's less clear how the shops would fit in. It seems unlikely that Penney will be able to use the Martha Stewart name once the legal battle with Macy's is over, yet the store retains several viable high profile shop candidates, including Liz Claiborne, Cindy Crawford and Royal Velvet.
     Private Property: Even before Johnson's departure rumors had started to swell about outside investors looking at taking Penney private. It is not as much a gargantuan task financially as it once was given the falling Penney stock price and frankly, it would provide some muchneeded cover for some of the dirty work to be done without the scrutiny of public shareholders.
     If this were to take place - given past histories of such events - Penney would stay private for three to five years and would probably do some serious downsizing in the interim. New management would be put in place during the process and the Penney that emerged after it all would look substantially different though would likely have a serious debt load.JCP
     It certainly seems to be a more plausible scenario than other possibilities such as another retailer acquiring Penney. What exactly Kohl's or Macy's would do with 800 Penney mall stores is hard to figure out given their overlapping national footprints.
     For the home business, going private would be largely a non-event. With dating, factoring and a host of financing options, vendors would not notice much in the way of merchandising changes though there could be more risk-taking on the part of merchants less concerned with quarterly results.
     The Final Chapter: The elephant in the room in Plano is bankruptcy. Some observers think it's the best thing the company could do, getting it out of bad leases and bad locations while freeing up the working capital that invariably comes with DIP financing.
     Others caution that it could be the beginning of the end for one of the country's oldest retailers. That may be a little overly dramatic given that several of the biggest retailing operations in the country have been in and out of bankruptcy and lived to tell about it. Then again, some have not.
     It is the path to a potential bankruptcy filing that is really the trouble spot. Penney is going through cash at an insane rate - $500 million last quarter alone - and indications are that the burn rate may not slow down anytime soon.
     Right now, Penney is sitting on about $900 million in cash and is believed to have something over a billion dollars available on a revolving credit line. But at half a billion dollars a quarter that bank account could run dry in less than a year's time.
     Observers who really want to see how long Ullman has to fix things should follow the money.
     And for the store's home business, less working capital is never a good thing.
     There are of course lots of other permeations possible for Penney, but these seem among the most likely. Again, The Who might have summed it up best:
     "Change it had to come
     We knew it all along
     We were liberated from the fall that's all
     But the world looks just the same
     And history ain't changed."

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