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Why Nothing Myron Ullman Does Can Really Fix J.C. Penney’s Problems

NEW YORK (TheStreet) – J.C. Penney (JCP - Get Report) interim CEO Myron “Mike” Ullman has done a good job at stemming the bleed, turning sales around, replacing private brands and filling the coffers. However, no matter what Ullman does, it won’t fix the underlying problem at J.C. Penney – that when it lost nearly a quarter of its sales under the previous regime, once a customer goes, it’s hard to get them to come back.

J.C. Penney shares have fallen 26% over the past 12 months -- a disappointing result for shareholders even as the company climbs its way out of the hole it found itself in under former CEO Ron Johnson. This comes in the face of stores like Macy’s (M - Get Report) that offer either more value for their dollars or a better consumer experience.

“Ullman is the right man in this tough situation because he needed to bring some semblance of order, some semblance of stabilization … of teamwork back,” said Robin Lewis, CEO of The Robin Report newsletter and co-author of The New Rules of Retail – Competing in the World’s Toughest Marketplace in a phone interview.

But now the Plano, Texas-based department store chain needs to a leader that can position the company for growth, Lewis noted. “To grow that business back to anywhere near where it was, it’s going to be very difficult in this economic environment where [J.C. Penney’s] got direct competition in Kohl’s (KSS) and Target (TGT), but also facing an ever strengthening and growth-accelerating Macy’s,” Lewis said. “It’s a very tough situation.”

Lewis estimates that during Johnson’s tenure, Macy’s took roughly 25% of J.C. Penney’s market share, specifically consumers within the upper-economic stratosphere of that demographic.

There are signs of hope though, including a brand new store located in Brooklyn, N.Y., that exemplifies the future of the J.C. Penney brand. The new store is smaller -- at 124,000-square feet – has a more contemporary look, and is located in a “high potential” market that will feature both private and national brands, the company said on August 5. J.C. Penney has roughly 1,100 stores according to it 2013 annual filing. The company said earlier this year that it planned to close a handful of underperforming stores.

“I think that Mr. Ullman by opening that store … is showing a great step forward for J.C. Penney. It’s a much cleaner look. It’s a much better look. It’s a store that sells itself,” said retail expert Walter Loeb, president of Loeb Associates and author of the Loeb Retail Letter, who has visited the Brooklyn store. "The question is, how much cash will Ullman be able to generate “above his expectations and our expectations,” Loeb said.

J.C. Penney completed an equity offering in Sept. 2013 in which it raised net proceeds of $785 million. In June of this year, the company entered into a senior credit facility of $2.35 billion comprised of a $1.85 billion revolving line of credit and a $500 million term loan. That $2.35 billion credit facility replaced an existing $1.85 billion loan.

The company also hired former Saks CIO Mike Rodgers in February to move forward its efforts in stores, the Internet and on mobile devices, and the company made a case to TheStreet in May that it is paying considerable attention to its online and mobile efforts. In addition, store comparable sales are finally starting to grow again, (6.2% in the first quarter), showing that the customer is slowly returning.

Improvements have been made, but the company is far from where it was prior to Johnson’s hiring. Even then, it wasn’t doing that great with annual sales declining over the last seven years, with the exception of 2010. For 2011, (Johnson was hired in November of that year) sales fell 2.8% to $17.3 billion. In 2012, sales plunged 24.8% to $12.98 billion, and fell another 8.8% to $11.86 billion in 2013. Sales for fiscal 2014 are expected to total $12.4 billion, according to analysts surveyed by Thomson Reuters.

It’s having trouble hiring a new chief executive – a point made clear when Target said on July 31 that it had named former Pepsico (PEP) executive Brian Cornell as its new leader, after looking for less than three months. Reports surfaced earlier in July that Home Shopping Network’s (HSNI) CEO Mindy Grossman had declined to take up the position at J.C. Penney.

Ullman may be cleaning up the mess handed to J.C. Penney by Johnson and making some changes, but when it comes to the department store chain’s strategy going forward, it’s likely his hands are tied for the most part.

“It’s tough for him to make strategy decisions now for the future of the company if they’re looking for a new CEO. I don’t think there’s much he can do,” said Rick Snyder, equity analyst at Maxim Group, who has a "hold" rating on J.C. Penney. “He doesn’t want to be in a situation where he comes in a starts making a lot of wholesales changes and the new CEO comes in and says that’s not what I wanted to do."

J.C. Penney will report second-quarter earnings on Thursday after market close, where it is expected to show same-store sales growth of 5.8%, compared to a decline of 11.9% in the year-earlier quarter, according to analysts’ consensus. Yet the company is still expected to report a loss of 93 cents a share for the quarter compared to the loss off $2.20 a share in last year’s quarter.

So what does the J.C. Penney of the future look like?

Robin Report’s Lewis, who has written extensively about J.C. Penney as well as other department stores, predicts department stores will eventually have to become “mini-malls.”

Under Lewis’ vision, the department store will turn into a destination that includes entertainment, fashion shows and restaurants, but most importantly will house “boutiques” that will be brand specific (private label or otherwise), which will essentially lease space to various brands.

It was a plan that ironically, Ron Johnson envisioned too.

--Written by Laurie Kulikowski in New York.

Follow @LKulikowski

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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