Market sours on JC Penney's 'transformation'

Hopes were high in late 2011 when JC Penney tapped the man behind Apple's sleek retail operation to lead the 111-year-old department store chain. The feeling was that the Penney brand had gotten dowdy and someone new was needed to spice things up and lure in younger customers. Enter Ron Johnson, who after successful runs at Apple and Target, was given wide latitude to remake the company. The chief executive launched significant investments in new housewares operations and brands and ended Penney's long-standing staples of sales and coupons. But Thursday the market came down hard on the company and Johnson after a disastrous fourth quarter called into question the viability of the strategy. JC Penney's fiscal quarterly and full-year results, released Wednesday after the markets closed, contained a battery of ugly stats: an annual loss that widened to $985 million from $152 million a year ago as sales dropped 25 percent, and a 32 percent drop in comparable store sales in the fourth quarter. Shares dived 17 percent in heavy trade but closed off deeper losses at $17.57. Johnson, addressing analysts on a conference call, acknowledged that he has learned from some "mistakes" and decided to reverse course and resume sales and coupons. But the controversial CEO was hardly apologetic, touting the more glamorous feel of the stores, a new leadership team and a retail operation in which employees use hand-held devices to complete transactions with customers, a la Apple. "I told you this would be a multi-year effort, and it will be. I told you transformations are unpredictable and can be bumpy and this one has been," Johnson said. "But our resolve has never been higher, and we greatly look forward to year two of our transformation." Johnson highlighted a number of new initiatives that he expected would bear fruit: the March launch of the Joe Fresh apparel brand in the US; the revamping of the Home Department, which has required an average of 19,000 square feet (1.8 million square meters) of construction per store; and a new ad campaign unveiled during Sunday's Academy Awards broadcast. Johnson would not give guidance on current sales. Pressed on whether 2013 would see a return to growth, he declined to say. "Obviously, our commitment is to return to growth," Johnson said. "The sooner we do that, the better, but we are here for the long haul, and we believe we are taking the steps needed to return to growth and we will report that to you soon as it happens." But analyst reports suggested the market was beginning to lose patience with the turnaround. A note from Morgan Stanley questioned J.C. Penney's financial statements and said it appeared that the company's balance sheet overstated cash by $344 million. The note suggested J.C. Penney would "likely" need a credit line draw later this year. "We remain underweight and see further downside risk to the Street's '13-'15 outlook," the note said. Gilford Securities accused Johnson of "cherry-picking" data and blasted the chief executive in a note titled "CEO is learning on the job; at a big cost." Gilford warned about rising expenses, which is "emblematic of damaging evidence that Johnson glosses over as he sweet-talks and spins visions of a new era for Penney, even as JCP seems to be approaching the point at which damage becomes irreparable."