http://online.wsj.com/article/SB10001424127887324504704578411031708241800.html?mod=e2twPenney CEO Out, Old Boss Back In
By JOANN S. LUBLIN and Oceander MATTIOLI
J.C. Penney Co. JCP +2.72% dumped Ron Johnson, the chief executive it poached from Apple Inc. AAPL +0.71% with great fanfare 17 months ago, replacing him midway through a major overhaul of its stores that has produced a disastrous drop in sales.
Penney's board met Monday and agreed to part ways with Mr. Johnson. Sorting out whether to press onward or roll back Mr. Johnson's changes will fall to his predecessor, Myron Ullman, who is rejoining the company as CEO.
Mr. Johnson's exit will mollify some increasingly impatient investors and tamp down discontent among some within the company, but it leaves Penney in a tough spot as it is burning through cash and shedding customers.
Mr. Ullman faces long odds. Retailers fight for every percentage point of sales improvement, and few have rebounded from declines as deep as the 25% drop under Mr. Johnson's first year at the helm. In a sign of investors' concern, Penney's shares fell more than 10% in after-hours trading on Monday before bouncing back to $15.50.
In an interview, Mr. Ullman—who will also get a seat on the board—acknowledged the tough job Penney faces to climb back from the drop in sales and profitability, but said he has yet to make any decisions about what to keep and what to replace from Mr. Johnson's strategy, including the former CEO's management team.
"I wouldn't recommend that we go back to the way J.C. Penney was when I left. Things change," he said. But, he added, "There's no reason to try and alienate customers who want to try and shop at J.C. Penney."
Mr. Johnson declined to comment.
The return of Mr. Ullman, 66 years old, shows the challenge of filling the top job at the struggling chain. A number of other retail CEOs have said they would have been unwilling to take on the job given the size of the company's problems and constraints on its cash.
Penney's largest shareholder, activist hedge-fund manager William Ackman, was instrumental in establishing the 56-year-old Mr. Johnson as CEO in place of Mr. Ullman. The former CEO's return means Mr. Ackman "now has to eat crow,'' because Mr. Ackman wanted Mr. Ullman to retire and make way for Mr. Johnson, said Jeffrey Sonnenfeld, a senior associate dean at Yale School of Management. "He made a mistake.''Mr. Ackman didn't immediately respond to requests for comment.
Penney hailed Mr. Ullman as an accomplished retail executive with proven leadership ability.
The board's decision ends a brief and turbulent career in the corner office for Mr. Johnson. He arrived at Penney to great fanfare in November 2011, but lost the confidence of directors and investors after he rolled out an ambitious plan to reinvent Penney's stores without following the usual retail practice of testing the changes first.
Penney paid heavily to lure Mr. Johnson from Apple, issuing the new CEO about $50 million in stock to make up for equity awards he left behind at the iPhone maker. But the company isn't obliged to pay him much to leave. Mr. Johnson opted not to enter into a termination pay agreement, according to the company's latest proxy, which says the former CEO would be entitled only to any unpaid salary and $143,924 from a savings plan and the value of unused vacation. In a securities filing Monday, Penney didn't say whether Mr. Johnson would receive any additional severance pay.
Mr. Johnson also holds warrants that enable him to buy nearly 7.3 million shares of Penney's stock. He spent almost $50 million on the warrants, but their exercise price of $29.92 a share is about twice the stock's current level.
Mr. Johnson was unapologetic about his decision not to test. Asked earlier this year if he would do things differently given a chance to start over, he replied, "No, of course not."
Penney's revamped stores and new lines of merchandise, such Joe Fresh, won praise from analysts. But shoppers were turned off by Mr. Johnson's decision to cut back clearance sales and didn't respond when Penney started to reintroduce markdowns last year.
Sales fell 25% in the year ended Feb. 2, depriving Penney of $4.3 billion in revenue and causing analysts to ask whether it might run out of cash needed to fund its overhaul.
The results were diametrically at odds with the high hopes that greeted Mr. Johnson upon his arrival from Apple, where he won praise for helping create a new and lucrative style of retail. But the experience didn't translate well to Penney's customer base of bargain hunters.
Mr. Johnson's fortunes turned a few weeks ago, when the company began looking for management alternatives, one person familiar with the matter said.
Mr. Ackman regularly said last year that he was willing to wait for the turnaround to start getting traction. But by last month he was among the board members who were putting the CEO on a shorter leash, people familiar with the matter said at the time.
Also last month, fellow activist Steven Roth's Vornado Realty Trust, VNO +1.10% at the time Penney's second-largest shareholder, dumped more than 40% of its stake. At Friday's close, Penney's shares were down more than 20% so far this year.
Messrs. Ackman and Roth have seen their holdings pummeled by the steep slide in the company's shares. The stock closed up 2.7% Monday at $15.87. The two investors disclosed their stakes in the fall of 2010 and built their positions at a cost of $25 to $30 a share, according to securities filings and a person familiar with the matter.
Some Penney officials in recent weeks sounded out executives who might be able to take on a senior role at the company, people familiar with the matter said. Those executives include Vanessa Castagna, a former senior executive at Penney and onetime contender for the company's top job, the people said. She is now a retail-industry consultant who serves on the boards of Levi Strauss & Co. and Carter's Inc.
Howard Schultz, CEO of Starbucks Corp., SBUX +0.55% believes Mr. Ullman, a longtime director at the coffee company, faces a daunting assignment because Penney is in a crisis, saying: "The biggest challenge is the significant headwinds of the marketplace and some of the damage that has been done to the J.C. Penney brand.''
