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CNBC EXCLUSIVE: CNBC TRANSCRIPT: J.C. PENNEY CEO RON JOHNSON SITS DOWN WITH CNBC’S COURTNEY REAGAN TODAY ON CNBC

Steffanie Marchese
Tuesday, 31 Jul 2012 | 1:09 PM ET

When: Tuesday, July 31st at 10:30AM ET

Where: CNBC’s “Squawk on the Street

Following is the unofficial transcript from a CNBC EXCLUSIVE interview with J.C. Penney CEO Ron Johnson today, Tuesday, July 31st, on CNBC’s “Squawk on the Street.” Excerpts of the interview will air throughout CNBC’s Business Day programming.

Following are links to video on CNBC.com: http://video.cnbc.com/gallery/?video=3000106387 and http://video.cnbc.com/gallery/?video=3000106429.

All references must be sourced to CNBC.

COURTNEY REAGAN: So I'm joined by JC Penney CEO Ron Johnson and Ron, we're here in a prototype of something that we're going to soon see across the country. Can you describe to me a little where we are, what we're looking at?

RON JOHNSON: Sure. Well, we're at the site of the infamous Nina tweet, you know--

COURTNEY REAGAN: That's very true.

RON JOHNSON: --last week. Nina came through here and she was kind of smitten by what we're doing and-- no, we-- as you know, we're here to transform JC Penney, not to improve it. We're creating an entire new retail experience. And it's hard to explain to people, so we thought, "Why not build out an environment that people can experience?" And so this is about-- nearly a 20,000 square foot mockup of what we want to create, which is a real new category of department store. And we think it's pretty exciting.

COURTNEY REAGAN: And so starting tomorrow, August 1st, is when the shop concept truly begins in earnest. Correct?

RON JOHNSON: Yeah, we're essentially going to create what we think is the first ever specialty department store. Today there are traditional department stores like Macy's, promotional stores like Kohl's and we have been, discount stores like Target.

This is a whole new category of department store where it's really organized by shops and then it's served by specialists. All the employees are specialists and experts in the products. We're rolling that out, as you know, store by store. And tomorrow we open our first six shops in most of our stores across the country. Like a whole new way to buy jeans from-- Levi. And so it's a big day tomorrow. As we begin people are going to see the concept that we're creating.

COURTNEY REAGAN: And back in January you said ultimately it's about products. It's about presentation. We've seen some of the pricing so far. Some of it has not resonated with consumers and there is some concern that some of those shoppers have been lost, potentially to competitors. How are you going to get this product message across to those consumers?

RON JOHNSON: Yeah, that's a great point, 'cause we've confused people with our pricing. You know, I thought-- and I take full responsibility for this. We thought going from 590 unique sales where the price is changing every day to three types of prices would be simpler. But people found that confusing.

So tomorrow we go to, essentially, the first price is the right price. You know, everyday low prices. And it's really very common today. If you look at how most people buy apparel, you know, the good apparel retailers are Forever 21, H&M, UniGlow. Even Joe Fresh…becoming JC Penney, that's how they price goods. And…you shop at Costco or Wal-Mart or Starbucks, that's how they price goods.

So we kind of look at we're getting in the mainstream, but we had to retrain a customer that for years we taught to look for value through the illusion of savings. And we're just going to deliver those savings every day. And we've struggled a little bit, but tomorrow we simplify our pricing and I think it's going to really help.

And then we'll start to communicate. You'll see in all of our messaging it's about the product. So we have eight-- pre-prints this month. You know, the first Sunday, first Friday of every week for back to school. And the product's the star and the price is large and straightforward but it's not confusing. And we think that will attract people.

COURTNEY REAGAN: What do you think was confusing about the message in the first place? Like you said, you thought it was simple and you thought we were…90 to…here--

RON JOHNSON: I-- you know, I think, quite frankly, we didn't have the courage to do what we should have done. You know, we knew, based on our heritage-- now if you go back to the founding of this company, JC Penney believed in everyday prices. He said, "We don't mark goods up just to mark them down. We don't believe in sales. Even 10% off. We don't do that kind of business."

And we left room for what we called the month long value. And so people said, "Well, if you have great everyday prices, how can you take a discount for a month?" And they didn't trust us as they should. And so now we just go to the first price is the right price and they'll see it throughout the store. I think people will understand. And in time they'll learn our pricing. Everyone has to learn the pricing of every retainer, 'cause everyone has a slightly different pricing strategy. And the change is hard but it's the only way we can create what we're in today. It enables everything.

And ultimately stores are about product and presentation and people. And the price just delivers that value-- but that's the enabler. And that's the hard thing. But now we enter phase two of our transformation where the shops come in. We start to do things like free haircuts for kids. So a lot of the excitement will start tomorrow.

COURTNEY REAGAN: And the free haircuts for kids has gone really well. Can you talk about what--

RON JOHNSON: Yeah, it's really-- yeah, we decided-- our goal here at JCP is to help America look and live better every day. And when kids go back to school we want them all to make a great first impression. And historically that's been about the clothes they wear. But we have all these salons and we thought, "Why not offer every kid K through six in America a free haircut?" And we've got-- we'll actually have about 100,000 kids get their haircut at JC Penney tomorrow. And that's a pretty incredible thing.

And the stories are so heartwarming. I didn't realize how many Americans, middle class Americans, you know, cut their own kids' hair 'cause they're on a tight budget and they got to make a tough choice between haircut, clothes. And I'm getting all these emails. "We can now buy a wardrobe," and "Thank you for helping my kid look better." And we think it's part of a mission of helping America look better and live better every day.

COURTNEY REAGAN: You've had to also retrain your employees and retrain specialists that you're going to have in the shops now. What is employee morale like? Are they less confused? Do they understand the mission…?

RON JOHNSON: You know, it's been a real-- one of the great hallmarks of this company is their really committed employees. 110-year-old company, we've gone through a lot of change which has been incredibly hard on the teams in the stores, on the teams here in Plano. But I think they're picking up.

With-- the moment the shops started to be constructed they felt the change. You know, and I was in stores this weekend in the Midwest and the enthusiasm of the employees was palpable. And they're so excited to help people with free haircuts tomorrow. They're excited to-- create a whole new way to buy denim.

And so I think morale's picking up really well. But anytime you go through a lot of change-- you know, don't put your head in the sand. It's hard. You know, eventually we'll get them because we're doing the right things and we're honoring our unique heritage, which is founded on the golden rule. And we call it fair and square today. But I think people like to work in an environment where there's true integrity. And for us the truth starts on the price tag.

COURTNEY REAGAN: You did have to make some layoffs and you had to cut commissions. Did they understand that process as you were going through it?

RON JOHNSON: Yeah, I think they do. The commission change, for example. We want everyone in the store, one team, one mission, to look in the customers' hearts and take care of them. Very simple. In a store this size we had 12 unique compensation programs. Different for people in furniture, from the salon, from jewelry, from shoes.

And that's very complicated and it takes a lot of work to administer that. And, you know, a lot of great retainers don't use commissions. We never used them at Apple, for example. And I think it's a better thing to do to pay people in advance for the good you have-- want them to do and let them look in the customers' hearts and try to help them live better.

You know, that's just a better way to run a business. And so the teams understand. And it was a tough change, but you can really feel them seeing the benefit of that today as they get to work throughout the store and work together as a team. So--

COURTNEY REAGAN: And this pricing you’re doing, it's a different kind of approach…someone else. And you have started…on sale and clearance.

RON JOHNSON: Not sale. Clearance.

COURTNEY REAGAN: Clearance.

RON JOHNSON: Yeah, not sale at all.

COURTNEY REAGAN: Okay.

RON JOHNSON: No, sale is not in our vocabulary. You know, we essentially have-- every item in the store is priced to be its best priced every day. And when it's time to go away, we'll call it clearance, which is the standard industrial language. Now that was part of our problem in the spring. We created a new name for it. We called it best price, 'cause it is the best price yet.

But customers thought, "Well, if that's the best price, what's your everyday price?" This part of the confusion was our mistake. I take responsibility for it. But now we've got the simplest pricing strategy I can imagine. Just great everyday prices. When it's time to go away, clearance, which everyone understands.

COURTNEY REAGAN: And retraining that consumer is going to be even more of a challenge when your competitors are still using coupons, isn't it?

RON JOHNSON: Yeah. I don't-- I don't think so. You know, for example, you know, our sales were down nearly 20% the first quarter. Well, the pessimists can say, "20% of the people didn't come." The optimists would say, "80% of the people bought at the first price, right price." Now that's four out of five people understood the value and bought. And as time goes on, more and more people understand the value. So there is a massive retraining and reeducating of the customer.

But I look at that as kind of an investment we're making to enable what you see here. It's the investment to repurchase James Cash Penney's integrity. And that's how this company was founded. On the principle of fairness. You know, we don't mark goods up to mark them down to create the illusion of savings.

And I think this country needs more fairness. And that's an issue with how people think about government and big business and I think a little more truth-- in our country in a lot of ways will go a long way. And as I said before, for us, you know, we saw a lot of things, but the most important thing we give away for free, and that's truth. And it starts on the price tag. And the customer will see the value of that over time

COURTNEY REAGAN: At your first quarter earnings presentation there was some disappointment. You mentioned the sales were down 20%. S&P has lowered your credit rating. Your stock price is down 37% since you announced the transformation. You have said this is a marathon and not a sprint. Well, but investors do need metrics along the way and that's all they have so far. Do you think it's been unfair, the way that JC Penney has been graded by the investment community so far?

RON JOHNSON: No, I think investors have a right to make their decisions. I think one of the things we've done is we haven't told our story. And so in the absence of information there's a lot of misinformation. Like all the comments at…about our balance sheet. We have a rock solid balance sheet. The least fear I have is liquidity.

You know, we're just trying to retrain our customer and do a lot of good work, but that's an example of what happens in the absence of information. And so part of my talking to you today is we think we want to share with investors where we're headed. And I think when they see the vision, at least the longer-term investors will be more inclined to want to participate.

You know, 'cause we talk we've got a great idea for how to really improve the way America shops. We think we've got a great vision for how to connect the emerging digital and the physical worlds in a way that really creates a compelling advantage for a store. We think we've got a great-- way to do business for the middle class, where we really put a big bear hug around the middle class and help them look better and live better every day.

And we want investors to understand where we're headed. And so that's part of why we built up this prototype so you can really understand this next generation department store. How shops and specialists and a new interface, which we call The Street, can truly change the way people shop for good. So we've just got to communicate better.

COURTNEY REAGAN: You spoke a little bit about liquidity. Last week you sold some of the non-core assets, …that you're going to…Simon Property Group for $240 million. Some were worried, "Oh my gosh. They need cash." Others said, "Nope, the balance sheet is strong," just as you've said. You have also said that you can self fund this transformation. Is that still the case?

RON JOHNSON: Absolutely. We can self fund this out of our cash flow. You know, this year we'll invest nearly $800 million in our stores, in our shops, in our technology to create a new platform and our balance sheet is strong to do that. So we don't have a concern about cash. We've got a concern about really communicating to our customer. But we'll get through it.

We have non-core assets, which is kind of a benefit. You know, that were really under-- misunderstood on the balance sheet. I don't think we got any credit for it. And they aren't essentials of what we do here every day as a retail strategy. So we think monetizing those has been a long-term opportunity for us. And the stronger the balance sheet, the better we'll be for investors. And so that was what we did with Simon. We've got more to come. But, you know, that's what that was about.

COURTNEY REAGAN: And in January you said this was going to be a tough year and so far it has proven to be. But you also said that it will not be a throwaway year financially. Can you still say that?

RON JOHNSON: You know-- it's been tougher than we anticipated. I said that, you know, in May. You know, we expected to be down. We are down a little more than we thought, but not enough to change the strategy. You know, we're treating this company as a startup. Right? And we're inventing a whole new model to do business.

And we're leveraging the assets we had, whether it's our physical stores, our people, you know, our rock solid balance sheet to create a whole new way to shop. It is a one year transition that's part of a multi-year transformation. But once we get to one year of de-promoting or repurchasing our integrity, I fully expect us to grow. And so we've just got to get through that year. And we'll get through it.

COURTNEY REAGAN: How would you grade yourself so far?

RON JOHNSON: Oh, I'd say-- I'd give myself-- well, I know when Steve called me after he gave the Stanford commencement address, he said, "Ron, you know, could you give me a grade?" And this was four hours after. I gave him a B plus. And that went down as like the best graduation speech in (LAUGH) history.

COURTNEY REAGAN: You're a--

RON JOHNSON: You know?

COURTNEY REAGAN: --tough grader?

RON JOHNSON: I'm a tough grader. And I give myself, you know-- I don't know. If I look at the long run I give myself a B plus. You know, in terms of what-- the investments we're making for the long run and the new partners we have like Joe Fresh, the technology platform we've envisioned, the space we've created here in a matter of six months. I give us a pretty good grade on the long-term.

On the short-term I give us a lower grade 'cause we haven't executed as well as we could. We kind of confused with our pricing. Our marketing wasn't as direct as it could be. So I'd kind of be a little nuanced in my grading. But I give everyone an A-- for great effort.

COURTNEY REAGAN: So running a retailer is very different than working at Apple. You’re sort of part of a retail strategy.

RON JOHNSON: Sure.

COURTNEY REAGAN: How different is it working here than working with Steve Jobs?

RON JOHNSON: Well, it's great to be back in general merchandise. You know, as much as I loved Apple I'm not a technologist. You know, I just love being in stores, creating stores and those customers. And now I get to do that every day. And so that's a real fun thing to do. The difference, though, is, you know, when you work for someone like Steve, he's really always inspiring you to think differently and be your best. And in this environment I've got to be doing that on my own.

So I channel Steve a lot. You know, it's funny, a person like that you worked with for a dozen years, throughout the day, you know, it's, "Oh, what would Steve think?" And, "I wonder what happened here?" I sure wish he was here to get advice from at times. But it's different but it's good-- because in life you got to keep moving forward. And for me it's a chance to put-- a little mark on one of America's great companies.

COURTNEY REAGAN: So if Steve were here what would he say to you about how you have done so far in this transformation?

RON JOHNSON: Oh, I think Steve's advice would be, you know, don't worry about what others say. Trust your instincts. Do the right thing. You know, Apple went through a much tougher time, 2001, 2002, than we're going through this year. You know, people forget sales were up 38%, you know, as Apple went through that tough spot in the early 2000s.

When I joined Apple in 2000 the stock didn't get back to that value that I joined at till 2004. You know, we went through a pretty tough thing. So Steve would say, "Stay the course." But he would also say-- you know, the essence is in the simplicity. And so he would have liked where we are going on pricing, but he would have said, "You got to clean it up. You got to be more direct." You know, he'd like, I think, where we're going with our pricing tomorrow. But I sure wish I could talk to him. That would be nice.

COURTNEY REAGAN: And he was pretty direct, I would imagine. Probably wouldn't mess around and he would tell you exactly what he thought.

RON JOHNSON: Yeah, he would.

COURTNEY REAGAN: So if Steve's not here, who do you talk to? Who's your--

RON JOHNSON: Well, I'm just really lucky. I've got so many people I've met through the years in the industry that I pick up the phone and talk to. You know, Mickey Drexler has been a great friend and Apple board member. Really helped us with the Apple strategy. And I'll pick up the phone and talk to Mickey.

Board members. We've got a very good board. I talk to many of the board members, you know, each week, you know, on different topics. And my team. You know, we've assembled-- a world class team here that all understand where we're headed. And I like to think out loud. And so they probably get tired of it, but I'm talking to them all day long about, "What about this? What about this?" And so I've got access to a lot of people, which is really great.

COURTNEY REAGAN: Let's talk about your team for a minute, if we can.

RON JOHNSON: Sure.

COURTNEY REAGAN: You have a CFO. This will be his first quarter, right? As the CFO.

RON JOHNSON: Yeah.

COURTNEY REAGAN: Michael…just left just recently. There's been a big of concern about the lack of continuity in the C suite. What do you have to say to those people that have concerns about that?

RON JOHNSON: Oh, I think we have built an incredibly strong team. And, you know, it's-- it's too bad Michael's not here, but we had to make that change. You know, our marketing wasn't quite resonating as we hoped. And then as we built a really strong team in real estate and store design and operations and finance, you know, it enabled me to go back to my classic areas of interest, which are things like merchandising and marketing.

COURTNEY REAGAN: Which you've taken over.

RON JOHNSON: We've I've taken over. And I think the-- that's an example of what Steve would do. Steve said, "You know, you got to be like a butterfly as a CEO. You got to float in where you need-- the company needs help and really help do the work." And that's what I'm doing now with the marketing and with the merchandising. And I'm really enjoying it.

But Michael and I both decided we did not need two cooks in the kitchen. That's really the only change. You know, everyone else has kind of either been here a long time. About half of our leaders have been here for a number of years. About half are from the outside. And there's a good balance there. And they're starting to really work together well.

COURTNEY REAGAN: Are you going to continue in that role, doing the merchandising and the marketing?

RON JOHNSON: Yeah, I think for a while. It's really something I enjoy doing. It's something-- that's the most important thing to this company. And at the end of the day it's about the products we carry and how we present them and the service we deliver. And it's really nice to be involved every day helping to imagine the future for our merchandise, for our presentation, for our store design and for how we engage customers.

COURTNEY REAGAN: You mentioned Nina Garcia earlier. And so fashion editor Nina Garcia, activist investor Bill Ackman, they have said this strategy is a game changer. But they are insiders literally addressed it in the success of this plan. So some people are skeptical about what they have to say. What do they see that others don't?

RON JOHNSON: Well, I-- think they see-- the potential. Okay? In this world of a specialty department store for the first time ever all of the great brands in the world, whether you're a store brand like Joe Fresh or Sephora, whether you're a brand like Michael Graves or Jonathan Ambler, can be presented in their full glory where the shop has integrity, where it's about the merchandise.

It's kind of like the store is inspired by Selfridges and informed by Apple. And people understand that and recognize that the specialty store has been the best format in American retailing for the last decades. And they see this as the best of the specialty store format with the best of an Apple store-- because with the technology we can create a place that people want to be. You know, we call this The Street. That's where we're sitting today. And it's a new navigation path for retail. And it's dynamic. It's exciting. It lets the customer engage. And it goes along with the shops and the boutiques.

And so if you look at the productivity of specialty stores today, on average they are four times the productivity of a traditional department store. And so as you move into a specialty environment with all the technology and the service, if your sales can just start moving in that direction the returns will be incredible. And so I think they understand the vision. They're closer to it. They've seen it. And I think once you see it you understand. But before that all you see is the current performance. You know? And that's what we're here to do with you.

COURTNEY REAGAN: So as I look around I see product that's very colorful. The presentation reads very young to me. Very fashion forward. That's not who I think of as the traditional JC Penney customer. But as you reach out to this new generation of JC Penney customers, what about the moms and the grandmas that are coming here for years. Are they going to get confused? Have you lost them in search of a new customer?

RON JOHNSON: No, I don't think so. I think we-- there's a great reservoir of trust with JC Penney. Our pricing confused. Some of the customers miss their coupons, no doubt about it. But we can invite them back 'cause we know who they are. And we're going to do that as we move through the fall.

That's one of our core strategies, is to reconnect with our core. And you'll see that in our marketing. Our up-- on email. A lot of our social media. But this store is designed for all Americans. And we've got shops for a traditional core customer, you know, as well as-- you know, a younger customer.

And the challenge for any retail strategy is to retain your co-- core and slowly broaden your base. But that happens over time, 'cause people don't change their shopping habits overnight. You know, they got to hear about it, they got to hear from a friend and eventually they come. You know, the Apple stores were in some ways a disaster the first tor years-- two years. And nobody understood what the Genius Bar was. People said you should close it down. It's not working. We believed in it, we stuck with it and today they're quite popular. You know, same thing here. It's going to take a little time. But we'll get there, 'cause we're on the right path.

COURTNEY REAGAN: And the Genius Bars did take some time.

RON JOHNSON: Oh, it took--

COURTNEY REAGAN: And--

RON JOHNSON: --forever.

COURTNEY REAGAN: --now they've set records and led Apple to record breaking sales in Apple's history as well as in retail history. You saw something there that others didn't see. Same thing here as far as your vision is concerned. Can lightning really strike twice? It's really going to happen again?

RON JOHNSON: Oh, you know, this--

COURTNEY REAGAN: --retail strategy?

RON JOHNSON: You know, time will tell, but that's the fun. You know, the excitement in life is pursuing your dreams. The world moves by innovators and innovators have to have the courage to imagine something that hasn't been done before and the conviction to see it through.

And they've got to be able to inspire their teams to pursue that dream. And that's something that I've been able to witness throughout my career with the places I've worked and it's something I believe strongly. And I think innovation moves our country forward. And we need more of it.

And it is really hard. It takes a lot of courage. You've got to be able to willing to have a few, you-- you know arrows-- shot in your back. You know, but that's okay. You get up every day and you keep working at it and eventually, if the ideas are right, they'll thrive. And I think we'll see that here.

COURTNEY REAGAN: Is there a contingency plan if it doesn't work out?

RON JOHNSON: We believe in what we're doing. Now obviously if someone wanted to, they could re-promote. And if you think about it, we've lowered our cost structure nearly a billion dollars. So you can imagine how profitable this company would be if someone wanted to go back to the old pricing model. You know?

So that would be the ultimate contingency plan, but it won't happen while I'm here, 'cause I know it's not the right thing to do. And I know this is what connects completely with our own unique heritage. And every longstanding company has a DNA in its core that typically goes back to its founder. And when you reconnect with that, that's when good things happen. That's what Wal-Mart has had to do. And it's really led to great success. That's what Apple had to do when Steve came back.

That's what we're going to do. We're reconnecting with our heritage, which is founded on the golden rule. And you'll see it in everything we do, from our pricing to service to free haircuts. All these things are trying to help look and live better. And that's how we founded this company. You know, so we're on the right path. It's just going to take some time. It's a marathon-- and we're in the very early miles.

COURTNEY REAGAN: So all of this is very long-term and, again, we've talked about how investors are somewhat short term. …are they're looking for numbers. The numbers so far they have aren't great. That comp store sales number is very important to investors that look at retail. How long can you really put up with 20% negative in store sales and still keep people on board with the vision?

RON JOHNSON: Well, our balance sheet could allow us to do that for a long time. But I believe, you know, this is going to be a year of down sales. There's no doubt. We are de-promoting. It's one year. When we get to February, we now anniversary these lower numbers. We now have all these new shops coming out. All our new home strategies. People will start and will understand our pricing. We'll have learned to reconnect.

So I think we start growing again in February. The question is what size is the base company as a startup? Is it $15 billion? Is it $14 billion? It's still a big company. But we've got a future because of the hard work we did this year. Now that's the real question. Is how big will the startup be on February 1, 2013? Whatever it takes to get there is kind of just the price of repurchasing our integrity and we're going to do that. You know?

So we've got to get to the other side of this year. And we only have five months to go. You know, we did our last promotion January 1st last year. We're now on seven months. We have five to go. So we're nearly, you know, over halfway through and we'll make it. And we'll get better every day.

COURTNEY REAGAN: You're retraining consumers in a way that has not been done in a very long time, if ever. One day business schools are going to run... case study. Sometimes their case studies are successes and sometimes they're failures. What will the analysis be of JC Penney years from now?

RON JOHNSON: We'll all find out. You know, time will tell. Time will tell.

COURTNEY REAGAN: All right. Great. Thank you, Ron--

RON JOHNSON: Thank you.

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