Was J.C. Penney Wounded By Johnson’s Mass Layoffs?

Injured Piggy Bank WIth CrutchesFormer Chief Executive Officer Ron Johnson has not been the only J.C. Penney (NYSE:JCP) employee to lose a job as a result of his turnaround efforts, and these deep staff cuts have left the struggling retailer with a gaping wound.

The retailer’s ever worsening financial straits — Johnson’s efforts to steer J.C. Penney away from its image as a discounter contributed to a 13 percent drop in customer traffic and a 25 percent fall in revenues in fiscal 2012 — made the chief executive’s plan to cut jobs by the tens of thousands seem practical. For the past decade, J.C. Penney has provided close to 150,000 people with full- or part-time employment. But as of February 2, after one full year of Johnson’s leadership, that figure had dropped to 116,000.

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In reality, the cuts were not so practical. J.C. Penney’s devastated workforce has left Johnson’s successor Myron “Mike” Ullman — who has returned to the company as chief executive once again — with several problems, as The Wall Street Journal reported. Not only has employee morale taken a hit, but the job cuts also eliminated thousands of employees with expertise in designing and selling products favored by the customers that the retailer is struggling to win back. Ullman is now facing a huge task of halting the company’s plummeting sales, and the loss of these employees will complicate his efforts…

Johnson and his management team argued that the layoffs were necessary to his turnaround plan as the job cuts would boost J.C. Penney’s financials and make the retailer more competitive.

However, the cuts also reflected his opinion that the department-store chain needed to offer consumers more upscale products rather than the company’s traditional private labels created in-house, even though these items create a much more profitable business with higher margins. Johnson’s team “openly disparaged the house brands,” noted the Journal, despite the fact that they accounted for approximately half of the retailer’s sales. St. John’s Bay, one of those brands, once brought in billions of dollars a year in sales before Johnson eliminated its women’s line of clothing.

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With this opinion guiding his turnaround efforts, Johnson envisioned a cluster of boutiques that showcased products from Levi’s or Sephora that would take the place of these house brands…

The official layoff count during Johnson’s tenure stands at 19,000, and that abrupt downsizing — which was the result of an untested and radical overhaul — is evidence that shareholders were not the only victims of his misguided experiment, according to the publication. But Johnson believed that workers at the company’s headquarters in Plano, Texas, who experienced the majority of the layoffs, were under-worked. Chief Operating Officer Michael Kramer said the staff was wasting time watching videos on the Internet. Even the retailer’s largest shareholder, hedge-fund manager William Ackman, agreed. He argued in a presentation to investors last May that the staff was heavy with unneeded assistants.

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While this may be a true observation, one thing is clear. Before Johnson was charged with cutting more than $200 million in expenses from headquarters and revitalizing J.C. Penney’s business, it was a stable company. The department-store chain was cluttered and tired, the retailer had suffered as the result of the recession, and it was performing poorly in comparison with Macy’s (NYSE:M). But, its average sales had hovered around $17.5 billion for three years and its operations were generating cash. Comparatively, a year later, the retailer was in crisis and analysts warned that it could run out of cash in a year.

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