Chief’s Silicon Valley Stardom Quickly Clashed at JC Penney

Ron Johnson
Andrew Burton | Reuters
Ron Johnson

Maybe it was the ice sculptures. Or the order to stock slim, European-style men's suits. Or the swagger of a protégé of the mighty Steve Jobs.

From the moment Ronald B. Johnson arrived at the Plano, Tex., headquarters of J.C. Penney, some there believed he would not last long. On Monday, the doubters were proved right. After a tumultuous 17 months as chief executive of Penney, Mr. Johnson was pushed out.

He blew into Plano a star, a man who helped build the juggernaut Apple stores. But his Silicon Valley ways—evident from a showy party in early 2012 that he threw to celebrate himself and his plans, replete with a light show, fake snow and flowing liquor—jangled from the start.

His pedigree seemed impeccable. His B.A. from Stanford, M.B.A. from Harvard, years building Target and then, his time with Mr. Jobs. But it all ended on Monday when the board voted to replace him with his predecessor, Myron E. Ullman III, a move seen as a stopgap measure that did not instill confidence in the 111-year-old retailer's future.

Shares plunged by more than 12 percent on Tuesday as investors and analysts speculated whether the company could halt its current sales collapse or even avoid a takeover. (For the latest stock price click here.)

Mr. Johnson wanted to transform Penney into shopping wonderland with designer boutiques and stable prices instead of coupons. But many of his ideas were not tested and soon backfired, and in recent months the board, including William A. Ackman, the activist hedge fund titan who had recruited him, grew impatient.

No sooner had Mr. Johnson been named as chief executive in 2011 than he began poking fun at Penney's way of doing business. At a regular Monday sales meeting, "he was pretty sarcastic about our marketing and how ridiculous it was," and he asked the chief marketing officer to count up in front of the group how many mailings were sent each week, said one former employee who, like others who spoke for this article, asked to remain anonymous to protect working relationships.

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Mr. Johnson dismissed most of the top executives from Mr. Ullman's reign and brought in his own team, largely from Apple and Abercrombie & Fitch. Mr. Johnson commuted from California, and employees said he was a hard worker, decisive and responsive to even late-night e-mails. But few of the top executives he had hired relocated to Texas, instead working there a few days a week, staying "quarantined," as a veteran put it. Penney hands used the acronym AAPLE to refer to the newcomers — Apple & Abercrombie Paid to Lose Earnings.

Mr. Johnson liked to tell employees that there were two kinds of people: believers and skeptics, and at Apple, there were only believers. He wanted the same at Penney: when employees pushed back on Mr. Johnson's strategies, they got nowhere, according to several former executives. Even when Mr. Ackman urged him to meet with retail stars like J. Crew's Millard S. Drexler and Topshop's Philip Green, Mr. Johnson seemed to pay little attention to their doubts.

Mr. Johnson and Mr. Ackman did not return calls for comment. Penney declined to comment.

Former employees said Mr. Johnson was personable, and his plans were intriguing. Ken Murphy, senior vice president at Standard Life Investments, said that "many retailers, while openly cautious and dismissive of the JCP experiment, were actually nervously watching JCP's plans unfold with some concern that if their strategy worked, the industry would be required to adapt faster than expected to a new trend in retailing."

By early fall 2011, Mr. Johnson was tackling Penney's pricing, which he thought used too many discounts. He ignored a study Penney had just completed on customer preferences, and gave merchants a one-sheet grid explaining what prices they could use.

"Ron's response at the time was, just like at Apple, customers don't always know what they want," said an executive who advocated testing. "We're not going to test it—we're going to roll it out."

Suddenly, employees were changing price tags on tens of thousands of items. When an executive warned that Mr. Johnson's sales projections for the coming quarter were too optimistic, he declined to adjust them, the executive said. When the new pricing was introduced in 2012, sales fell.

(Read More: Johnson Wasn't the Only One With Big Ideas)

Mr. Johnson believed his taste was paramount, executives said. In January 2012, Penney unveiled its new strategy at Pier 57 in Chelsea, covering the room in pure white to signal that Mr. Johnson brought "fresh air" to Penney. The day before the event, Mr. Johnson tried out the attendees' chairs, found them lacking, and paid to have them replaced with white folding chairs suitable for a wedding.

Similarly, as Penney designed its in-store boutiques, Mr. Johnson pushed for the best shelving and signage, though cheaper options were fine, an employee said. Recently, Penney has backtracked on that, asking vendors to cover the costs for those in-store shops as it runs low on cash.

In a push to make Penney into, as Mr. Johnson called it, Bloomingdale's for Middle America, he ordered merchandising executives to move away from frumpy categories like maternity wear and toward slim-fit polos and European-cut suits — despite the fact that many shoppers went to Penney for figure-forgiving basics, according to two former executives.

He got rid of about 400 existing brands. In case shoppers weren't getting the point that they weren't good enough, Penney ran an Oscars ad telling customers they "deserve to look better." "If you're a certain customer and you've been shopping Penney's, that's kind of insulting," a former executive said. "You're going to come in and say, there's nothing for me."

One of Mr. Johnson's most prominent partnerships, with Martha Stewart, puzzled employees. He decided that to remake Penney, he needed to remake the home department, and do it with Ms. Stewart—who had an exclusive contract with Macy's.

"Martha is the key," he wrote in an October 2011 e-mail to himself. That December, Penney announced it was taking a 16.6 percent stake in Martha Stewart Living Omnimedia and would carry her housewares in its stores.

He did not ask for input from his staff on some promises he made to Ms. Stewart, like building her an e-commerce site or how her boutiques inside Penney stores would look. By January 2012, Macy's had sued.

(Watch More: Macy's vs. JC Penney Trial Resumes)

A lengthy and expensive court battle is in progress; a Citi report estimates liquidating the purchased inventory could cost Penney $100 million.

Mr. Johnson directed a "simplification" team to get rid of many of Penney's longstanding processes. In 2012, he revoked access to Penney's sales data for all but the top executives. But that took away valuable information: the buyer for, say, men's big and tall could not see how women's plus size was performing. As sales tumbled, executives said, Mr. Johnson finally seemed inclined to listen.

"Once his strategy got rolled out," said a former employee, "he would ask all the time: what do you think? Do you think it's working?"

Though Mr. Johnson was quick to make changes, like abandoning the "simple" pricing strategy and reinstituting promotions, it was too late. For 2012, Penney's revenue dropped 25 percent, to $13 billion.

The problems are persisting in the current quarter. Michael Binetti, an analyst at UBS, said he believed that new introductions likeJoe Fresh apparel were not hitting sales targets and that the heavy discounting Penney had resorted to suggested that sales were way down.

The continued slump probably forced the board's hand. Over the weekend, the chairman made his first contact with Mr. Ullman about taking back the wheel from Mr. Johnson.

"His hubris finally did him in," one former executive said.