JC Penney's new CEO readies for its next challenge

JCP's new CEO steps up

A new chapter is about to begin at J.C. Penney.

Marvin Ellison officially takes over the reins from Myron "Mike" Ullman on Saturday, becoming the beleaguered retailer's third CEO in four years.

J.C. Penney designed the transition to go as seamlessly as possible, especially after the messy ouster of former CEO Ron Johnson and return of Ullman in April 2013. Ellison has been working side by side with Ullman for the past 10 months as president, CEO designee and serving on the J.C. Penney board.

While Ellison and Ullman have crafted the current back-to-school and the upcoming holiday strategies together, Ellison still has a lot of work to do. At its peak in 2003, J.C. Penney generated $32.3 billion in annual revenue, but its last full year was less than 60 percent below that level. Shares are 90 percent below their all-time high, hit in 2007, and down more than 40 percent over the last 28 months under Ullman.

"[Ellison] came to the company on their darkest day, and he decided to be the guy to lock arms with his associates and have a keen understanding of their customers to really understand how to bring this company back into a path of profitability; that doesn't happen overnight," said Neely Tamminga, Piper Jaffray managing director.

J.C. Penney has an uphill battle. Despite all of Ron Johnson's faults, he saw a lot of these [external problems] coming: lots of competition, somewhat tough economic scenarios, and a consumer trained to look for deep discounts.
Brian Nagel
managing director, Oppenheimer & Co.
A J.C. Penney store in Laguna Hills, California
Scott Mlyn | CNBC

Last fall, the department store laid out its financial goals. Among them, the company wants to hit $1.2 billion in earnings before interest, taxes, depreciation and amortization and add $2 billion in sales by 2017.

The market is "skeptical" about the retailer's ability to meet those targets, said Deutsche Bank analyst Paul Trussell.

"Ellison's first task is to maintain the current momentum, and then step it up. Return the retailer to profitability and increase free cash flow," he said, adding that both have proved difficult for J.C. Penney.

A good first impression

Early this summer, Ellison told CNBC that he may be making some changes next year, but "change for the sake of change is overrated."

While Wall Street has only been briefly introduced to Ellison as the J.C. Penney CEO on conference calls and at a handful of recent conferences, he makes a good first impression, Trussell said.

"Those that have met Marvin have come away enthusiastic and optimistic," he said.

Ellison brings a different background to J.C. Penney. He came from Home Depot, where he was most recently the executive vice president of U.S. stores, holding a number of roles over 12 years that largely focused on operations and logistics. Prior to being at Home Depot, Ellison spent 15 years at Target, beginning as a part-time associate, when he said he made $4.35 an hour.

While some in the retail community are concerned about Ellison's lack of merchandise experience, particularly in apparel, others like the experience he brings to the retailer.

"It's not an issue that he comes from the operational side," Trussell said. "It's a crucial aspect to the J.C. Penney story going forward. He has to improve the store experience and environment, and integrate the stores with e-commerce in the most efficient manner."

Sterne Agee Managing Director Chuck Grom hasn't met Ellison, but so far he isn't convinced he is going to be a "game changer" for the retailer. Grom is betting cost-cutting and leveraging J.C. Penney's catalog infrastructure will likely be Ellison's signature strategies.

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Brian Nagel, managing director at Oppenheimer & Co., knows Ellison from his time at Home Depot.

"He's an impressive operator," he said, adding that Ellison has "a solid understanding of how to operate a large chain, connects well with the mass merchant consumer and is very approachable."

Growing up J.C. Penney

Ellison says he understands the J.C. Penney customer because he grew up in a household that shopped there. This summer, he told CNBC that he had many siblings and his mother worked hard to make ends meet and found value for the family at J.C.Penney.

"This journey for him is not just professional, it's absolutely personal. And we think it's that authenticity that's going to drive his authority, not only with his customer but also with his associates," said Tamminga.

While Nagel is largely an Ellison supporter, he maintains a "perform" rating on the stock.

"J.C. Penney has an uphill battle. Despite all of Ron Johnson's faults, he saw a lot of these [external problems] coming: lots of competition, somewhat tough economic scenarios and a consumer trained to look for deep discounts," Nagel said.

Grom said he wonders how the department store will get people excited and how it will position itself to truly compete with the off-price success stories like TJX and outlet centers, as well as foreign fast-fashion apparel players like H&M, Forever 21, Uniqlo and soon-to-come European low-price player Primark.