Facing sharp declines in sales and a plunging stock price, JC Penney's newly re-appointed CEO Mike Ullman must stabilize the struggling retailer's sales while modifying its strategy for winning over customers, analysts said.
Ullman, who previously served as Penney's chief executive for nearly seven years until 2011, takes the reins from Ron Johnson in a move widely labeled as positive by analysts despite the company's previous stock price slide while Ullman was CEO before.
Shares initially rose following the announcement of Johnson's departure but later erased gains once the company said Ullman would take over.
Jeffrey Sonnenfeld, a senior associate dean at Yale Management school, said it's difficult for a former CEO to return since people look for something new, a "messiah coming from the outside." Ironically, this market reaction could be a positive for Ullman, Sonnenfeld told CNBC's "Squawk Box."
"Some would argue that this is the perfect time to come in," he said. "You have such low benchmarks, such low expectations. The market reaction yesterday is also comforting because someone doesn't have to worry about matching soaring market expectations."
Following the surprise announcement, analysts weighed in on what they see as Ullman's top priorities in his resumed role.
Regain JC Penney's Core Customer
With Johnson at the helm, the company set out to reinvent itself into a series of shops within a store and transform itself into "America's favorite store" as part of a multi-year transformation plan.
But in the process of going after a new customer base, the company lost touch with its core customer and saw its comparable same-store sales nose dive 25 percent last year.
Competitors pounced on the opportunity.
Dana Telsey, chief executive office of Telsey Advisory Group, stressed the need to bring this core JC Penney customer back — a move that she said is possible.
(See More: Should Ron John Return to Apple?)
"You're not going to get back all the sales you lost, but you can certainly make improvements on what you have," she said.
In a note out on Tuesday, Morgan Stanley analysts said the company is struggling to drive sales with private label brands that carry little to no meaning in today's market.
"We are convinced JC Penney needs a compelling way forward — but what that is remains to be seen," they said. "Johnson's path of aspiring to a new shopper did not work, but JC Penney struggled to stabilize sales before Johnson's arrival."
Although most analysts viewed Ullman's return as a positive, J.C. Penney's stock dropped 17 percent during his tenure while shares of competitors Macy's, Kohl's and Dillard's rose. The slide continued during Johnson's time at the helm, falling another 51 percent.
Regaining this customer, whom Johnson tried unsuccessfully to wean off of discounting and promotions with everyday-low pricing, means bring back more discounts. Following sharp sales declines in the fiscal year, Johnson had already begun issuing some coupons again after acknowledging that customers enjoy discounts.
In a report issued on Monday, JP Morgan analysts said they expect the company will return to coupons and promotions as part of an effort to stabilize itself before the crucial back-to-school season.
Citigroup analysts listed stabilizing sales as one of Ullman's top five priorities and said it expects the company to return to its traditional high-low promotional strategy and to increase advertising.
"You have to have the discounts, but then you have to have full price, too," Telsey said. "You have to give the consumer product that they're willing to pay full price for, and that's branding the store."
Analysts cited JC Penney's balance sheet as another concern. To fund its transformation, the company has used up a considerable amount of its cash reserves and ended the fourth quarter with $930 million in cash. Morgan Stanley analysts said these balance sheet concerns will likely remain ongoing and said they think driving sales and margins will require significant capital expenses, more ecommerce investment and possible store closures — all of which will require additional cash.
Oppenheimer analysts forecast the company would burn through another $1 billion in cash during the first half of the year and expect the company to borrow under its existing credit line as early as July.
"Recent comments from JC Penney management imply that the company might seek a near-term financing solution to ease vendor concerns and limit distractions for the chain," the report said. "We expect that last night's news of a CEO change could accelerate any financing efforts."
Ullman returns to JC Penney roughly one third of the way into its transition to a shops-within-a-store model, a transition that "has thus far displayed only scant evidence of success," Oppenheimer analysts said.
Looking ahead, analysts expect Ullman to continue with the transformation of Penney's home goods section, which includes 33 shops by May, but to examine plans after this and possibly slow the conversion rate in order to conserve cash.
It's noteworthy that Ullman, rather than Johnson, was the first to introduce the shop-in-shops concept when he partnered with Sephora in 2006 and MNG by Mango four years later.
Stabilize Talent and Morale
To cut costs amid flagging sales, Johnson turned to widespread layoffs during his tenure, a move that Citigroup analysts said reduced morale at the retailer. Boosting this morale, along with recruiting talent, are two priorities for Ullman, Citigroup analysts added.
"We believe Mike will tap his retail Rolodex and past JC Penney management to bring back department store talent the organization," they said while also fostering internal talent.
-By CNBC's Katie Little; Follow her @katie_little_
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