Penney pinched

Falling sales and claims of sexist, insular management plague Plano-based J.C. Penney. Can a woman -- from Wal-Mart of all places -- turn the troubled chain around?
Hadley Hooper

In 31 years, Kay Baker rose from a job as a teenage sales clerk at a J.C. Penney store in Oklahoma City to become one of the retail giant's top-ranking female executives. Her fall from Penney's corporate headquarters in Plano would take only days.

It was a swift end for the devoted employee of a company that prides itself on loyalty to its workers. Unfortunately for Baker and J.C. Penney's bottom line, loyalty at the company's executive offices flows more freely to Anglo men -- or to their wives and children.

That, at least, was Baker's contention as she battled a dismissal she says was based on a trumped-up charge that she fudged year-end sales figures to earn a bonus. The truth, Baker claimed in a lawsuit against her former employer, was that she was fired in retaliation for rebuffing the sexual advances of another J.C. Penney Co. Inc. executive.

Baker would eventually win a half-million-dollar judgment against her former employer. While the outcome of her case was widely reported, the details of her testimony during a private arbitration hearing were not made public until now. Baker's testimony, bolstered by comments from other former female employees who spoke with the Dallas Observer, portrays J.C. Penney's leadership as an insular men's club rife with nepotism. These women suggest that the company's practices of promoting from within and protecting the boys in the executive offices have created a management team unable to deal with an unpredictable retail market.

That may partly explain profits at J.C. Penney's 1,150 department stores have stayed flat over the past three years. (The company, whose sales total $29 billion annually, also owns 2,900 Eckerd pharmacies.) It may also explain why the company is looking to a woman -- an outsider from rival Wal-Mart, of all places -- to lead a turnaround.

Kay Baker frequently wept as she testified in late April 1999, most often as she recounted the sacrifices she had made for her job. A brief marriage had ended in divorce, so the childless Baker devoted herself to any assignment her bosses gave her, doing whatever was necessary to advance her career, she recalled.

"I remember sitting at the corporate apartments right in the heart of Manhattan," the 50-year-old Baker tearfully told the arbitrator. "Now, I grew up in Oklahoma. So I'm sitting here...on my 35th birthday listening to gunshots in the street and crying. I'm going, 'What have I done with my life?' This is just not the plan I had -- you know, get married, have children, but now it's [just] me. And I had my little dog with me, Nimbus, and that was about it. But it was...'Kay, this is a good job for you...Very few people get a shot at it.'"

Baker's aspirations died in March 1996, when J.C. Penney Chairman and Chief Executive Officer Jim Oesterreicher fired her shortly after she was accused of falsifying sales figures. Oesterreicher, who days before had sent a company-wide memo praising her department, never talked to Baker about the allegation.

Baker claimed that Oesterreicher fired her quickly to appease Thomas Hutchens, who now is president and chief operating officer overseeing the retail chain's international stores. She had rejected his sexual advances for the past 15 years, and Hutchens wanted revenge, she said.

"They took all my identity that I had with the company, my credit cards, my access to the building," Baker recalled. "And I said, 'Well, you might as well get a security guard to walk me out.'" A top executive told her that wasn't necessary and ordered her simply to collect her things "and get out of the building."

The firing wounded Baker even more because she believed that the company's bosses had consistently ignored the misdeeds of incompetent or dishonest Anglo men whose failings were revealed long before her dismissal. At the hearing, Baker's lawyer recounted three alleged instances in which J.C. Penney management either promoted or protected male executives who faced much more serious charges of wrongdoing.

One man allegedly led a group of employees in a scheme to sell fraudulently discounted merchandise to one another. He was transferred from his executive post and remains a store manager.

Another authorized the purchase of women's suits -- hundreds more than the stores could sell -- and hid the unused inventory for years, costing the company millions. The executive, who has since retired, was not disciplined. Instead, he became J.C. Penney's liaison to manufacturers of NFL-licensed merchandise, a plum assignment that meant coveted box seats at games.

Baker's lawyer even charged that the executive who had preceded her in the job as director of the custom-decorating department stole millions from the company. When Oesterreicher's management team discovered the crimes, they demoted him and dispatched him to a store in Houston.  

"These chaps were simply demoted, but you were fired in summary dismissal. Can you make any sense out of this?" Baker's lawyer asked her.

"They were men," she told him. "They had somebody that spoke up and said, this is wrong, this is not going to happen, and saved their jobs for them."

If good-ol'-boyism isn't hurting J.C. Penney's bottom line, then clearly something else is.

In the third fiscal quarter this year, which ended October 31, Penney's profits fell 24 percent compared with the same period in 1998. The company earned $142 million in the last quarter, compared with $186 million for the third quarter of 1998. Department store sales, which account for roughly 50 percent of Penney's annual revenues, have flagged or remained steady for three years in a row. Competitors report sales for their stores increased more 5 percent in October. J.C. Penney saw a 5.7 percent decrease for the month.

Upstart retailer Kohls opened four stores in the Dallas area last month. Since 1998, J.C. Penney has closed more than 75 stores, including one in NorthPark Center and another at Prestonwood Mall.

Even under the savviest management, the company would have faced a difficult road over the past few years. Discount chains and higher-priced retailers have squeezed middlebrow J.C. Penney. Shoppers hit Target or Wal-Mart for inexpensive items and head to upscale department stores like Neiman Marcus to pick up pricey designer products.

Nevertheless, J.C. Penney's corporate culture seems ill-suited for the task of keeping pace with changing markets whose tastes are determined mainly by women. The MTV generation now has credit cards -- lots of them. Nike and General Motors executives pay style-watchers to take them on visits to Harlem streets in search of marketing tips. And J.C. Penney's top management remains white-bread.

While Baker's testimony portrayed corporate ossification in its worst possible light, for years J.C. Penney executives proudly cultivated an insular atmosphere. Until recently, no top executive ever came from outside the company. At J.C. Penney, employees knew, loyalty paid off. Managers were almost all men who had been with the company two decades or more. Oesterreicher had 34 years with the corporation, and like most of the other directors had once served as a store manager. Many top executives were bumped up from stores into their executive positions when the company moved its headquarters from New York City to Plano nearly a decade ago.

J.C. Penney's bosses who weren't long-serving men might be those men's children or wives. Oesterreicher's son is a store manager, according to Baker's testimony. At one point four vice presidents were married to four other vice presidents. Marilee Cummings, who is president of merchandising for J.C. Penney's stores and catalogs and one of the highest-ranking female executives, is the daughter of a former vice chairman. Her husband also works for the company. Half a dozen of the former and current directors have their sons or daughters at the company.

It's not as though women aren't represented at J.C. Penney. Some 80 percent of the sales workers are women, as are 80 percent of the chain's customers. But until this summer, the company never had a female executive in the No. 2 position, overseeing the stores and catalogs. Vanessa Castagna, a former Wal-Mart executive, was chosen to become Penney's chief operating officer and executive president of merchandising about the time an arbitrator ruled that the company must pay Baker some $533,000 in back wages and deferred stock for her wrongful dismissal.

Credited with jazzing up Wal-Mart's clothing lines by bringing in brand-name fashions, Castagna arrived with high expectations. But some skeptics, particularly women who once worked for J.C. Penney and who say they suffered under an oppressive male atmosphere, are not convinced Castagna will have the clout needed to make dramatic changes.

"Is she going to be listened to, and is she going to be able to fire people?" asks former senior buyer Elise Greenberg.

So far, Castagna, who started her new job August 1, has kept a relatively low profile, canceling her first scheduled news conference in October. At a telephone conference last week, Castagna spoke publicly for the first time since coming to J.C. Penney. Stock market analysts who were allowed to question the new executive were polite, though some seemed anxious for her to speak candidly about J.C. Penney's veterans. Jeffrey Edelman, a research analyst at PaineWebber Inc., wanted to know what "surprises" Castagna had discovered "about the company's organizational structure."

Castagna deflected the question. "The surprise is that so much potential is already there," she told Edelman. Specifically, Castagna mentioned the $22 million J.C. Penney reported in Internet sales this past quarter, a figure higher than expected. Analysts agree that the company, with its large existing catalog sales operations, could become an Internet powerhouse if it harnesses the market correctly.  

Although upbeat about the potential, Castagna didn't misrepresent the obstacles before her. In the comments she made before taking questions, she sounded optimistic, though most of her points focused on change. The company's efforts to make a name for itself as a national brand (now led by a veteran male executive) "needs more work," Castagna conceded.

She said the company was "working with suppliers now in a way that J.C. Penney has never done before," trying to share more sales information via computer. She also said that the company's advertising and marketing had simply failed with consumers. It hadn't "shouted value," or clarified for customers precisely when a significant sale was to take place. Instead, the company had sale upon sale, which perplexed consumers.

But Castagna's most significant comments centered on a concept previously unknown at J.C. Penney: new blood. In establishing a team to take the company forward, Castagna said, "We're looking at a nucleus of J.C. Penney's associates, but we're also talking about a number of the best people on the outside that could add to the team process."

If Castagna's words translate into action, J.C. Penney could become a very different corporation.

Only six years ago, J.C. Penney earned the coveted reputation as a fun place to work.

In the 1993 edition of The 100 Best Companies to Work for In America, written by Robert Levering and Milton Moskowitz, J.C. Penney was among the top employers. The authors cited in particular the creed that founder James Cash Penney developed in 1913 -- 10 years after starting his retail chain -- which is referred to in the company as "The Penney Idea."

Penney wanted his employees, whom he called "associates," always to work with "honor, service, and cooperation." Veteran workers are supposed to wear a pin every day showing the commitment to those principles. He also wanted executives to share the profits and act according to the Golden Rule. He urged his employees to treat each other with the utmost respect and caring, as if they were family.

Levering applauded the family atmosphere and presence of so many family members at J.C. Penney in 1993. But now he says, "If nepotism becomes the culture, instead of a part of the culture, it's a problem... Any company culture can get out of whack."

By 1998, Levering and Moskowitz, who now compile their list annually for Fortune magazine, dropped J.C. Penney from their Top 100. As a policy, Levering won't say why a company falls off.

It couldn't have helped that J.C. Penney, after a short turnaround in the early '90s in which it set a sales record for stores and catalogs of $20.6 billion, began reporting quarter after quarter of nearly flat sales.

Oesterreicher was given credit for the earlier turnaround when he served as president of stores and catalogs in the early '90s. About the time he was promoted to chairman in 1997, however, the company's fortunes started to flag. Baker's lawyer, Pat Maloney Sr., claimed there was a direct relationship between Oesterreicher's leadership and the decline in Penney's fortunes.

A well-respected plaintiffs' attorney from San Antonio, Maloney portrayed Oesterreicher as ineffectual, chauvinistic, and sometimes downright vicious.

"Oesterreicher ignominious pygmy," Maloney told the arbitrator in his opening statement. "That's the only way you can describe him...He's small in thought, and he's the way he treats people."

A native of Saginaw, Michigan, Oesterreicher has worked 34 of his 56 years at the company. A business acquaintance, comparing Oesterreicher to other more dynamic Fortune 500 chief executives, says, "He possesses all the charisma of your pharmacist." New York Times business writer Leslie Kaufman described Oesterreicher as a Herbert Hoover, "proposing modest corrections even in the face of a deepening crisis."

Maloney grilled Oesterreicher mercilessly. "There's nothing funny about this, Mr. Oesterreicher...You can smile all you want, but you'll notice my client isn't," Maloney told Oesterreicher when he detected a grin on the J.C. Penney chairman's face. "Humor and smiling are two different things," Oesterreicher replied.

Maloney painted a grim financial picture of J.C. Penney and pinned the poor performance to Oesterreicher. Since he took the top J.C. Penney post four years earlier, the lawyer noted, the company's stock had fallen precipitously. The company's share price dropped from a high of $56 per share this summer to the low 20s in recent weeks.

The troubles at J.C. Penney department stores have made many Wall Street analysts keep the company stock on a hold status, advising investors not to buy shares.  

"They have been pretty stuck on their way of doing things," says Alan Mak, a stock research analyst for Argus Research Group. J.C. Penney doesn't seem to know who its customers are. Class-conscious consumers who once shunned low-end retailers such as Kmart and shopped at J.C. Penney now buy at The Gap and other brand-name specialty stores. For bargain hunters, J.C. Penney is a pale alternative to a Kmart or Wal-Mart, Mak says.

The company's customer base is "ill-defined," agrees market researcher Sally Schaadt at 14 Research Corp.

About a year ago, J.C. Penney managers began publicly acknowledging they needed to redefine their customer base.

"Our 1998 results were not acceptable," Oesterreicher said last February at an industry conference. He took a 17 percent cut in compensation last year, making his take-home pay excluding stock benefits $1.8 million -- a salary that is not particularly large for the CEO of a Fortune 500 company. "There's a lot of resilience to guys like that," says an asset manager whose investment firm has a significant stake in J.C. Penney when asked why the J.C. Penney board hasn't given Oesterreicher the boot, given the past years' financial reports.

Even before Castagna arrived, Oesterreicher began to take what amounted to dramatic steps -- for a somewhat stodgy company -- to reposition J.C. Penney and transform its culture.

For consumers, some changes already are apparent. In mid-October, Penney launched an estimated $35 million advertising campaign to alter its image. The ads target a group that Oesterreicher described at an industry convention last spring as "the modern spender." She is a creature that J.C. Penney marketing surveys define as a 35- to 54-year-old woman from a two-income household. The company estimates that demographic group accounts for 47 percent of its department-store sales.

In 30- and 15-second television spots, singer, actress, and one-time beauty queen Vanessa Williams croons as fashion models exult against urban backgrounds or dramatic landscapes. "The Look," a narrator announces. "Look who. J.C. Penney." The company's former campaign, "J.C. Penney, I love your style," has been dropped.

For the first time, J.C. Penney also has begun to alter who chooses what products go in the store. The results have been hipper merchandise, including designs by Evan-Picone and Liz Claiborne. Historically, J.C. Penney has operated with what is known in the industry as a "pull system" versus a "push system." Store managers told corporate buyers if they wanted to "pull" particular apparel into their store. (At Nordstrom, for instance, buyers "push" products onto the shelves.)

Former J.C. Penney buyers say they and their colleagues despised the pull system, which they argued put J.C. Penney out of step. "I remember when broomstick skirts were so hip," recalls one former buyer in the women's division, who didn't want her name used for this story. "They were flying off the shelves everywhere. But I couldn't get them into one store because the store manager's wife didn't like them." When she could get a product into a store over the managers' objections, they would sabotage her efforts, displaying a Halston dress, for example, on a mannequin pushing a vacuum cleaner.

This fall, the company has begun considering giving its buyers the final say-so. "It's being re-examined right now. A whole new team is working on it," says corporate spokesman Duncan Muir, who was the only current J.C. Penney employee willing to speak to the Observer publicly for this story.

But change doesn't come easily at J.C. Penney. Former female employees can tell you about that.

"You mean...the Evil Empire?" Baker said when asked in a telephone conversation to discuss her experience at J.C. Penney.

Initially, Baker agreed to an interview but later canceled the appointment. "I decided I want to close that part of my life," she said in a telephone message.

When the arbitrator's ruling was released in September, Baker told The Dallas Morning News, "I feel that I've won a tremendous moral victory."

But her lawyer, Maloney, says the experience sapped Baker's spirit. "She was completely broken," he says. She now sells residential real estate in the Dallas area.

Several of Baker's former female colleagues at J.C. Penney were sympathetic. They found the male dominance at the company and the resulting disparities insufferable.

Elise Greenberg was formerly one of three senior buyers in the men's division. She left the company 10 months ago out of frustration with a system that she says protected incompetent men. "I couldn't deal with the unethical business practices," Greenberg says. She remembers going to her boss several times with plans to save the company a bundle only to be scolded because she was offending a favored supplier. Once, she dropped a supplier who was charging $1 more for each pair of pants than a half-dozen other suppliers. "I was told, 'Don't ever do that again,'" she says. The problem? Her boss played golf with the supplier's chief executive.  

Greenberg bitterly recalls annoying slights during her 12-year tenure that showed women were second-class at J.C. Penney. In one instance, she was the only woman traveling with six male executives. Rather than lease a second car for the large group, Greenberg says, "They decided I could sit on someone's lap." Morning meetings had to be at the break of dawn and could never accommodate working mothers, like herself, who wanted to see their children off to school. Male executives had their suits altered by the company tailor at company expense. Women received no such perks.

Another buyer in the women's division, who was asked to leave four years ago and didn't want her name used for this story, recalls similar slights. She had to tolerate a young, problem employee assigned to her as a subordinate because the employee was the daughter of a retired member of upper management. "I went to my boss, and he said he will do nothing about it because I have dinner with her father once a week," the former buyer recalls.

Sexism wasn't always the issue. Sometimes it was plain old cronyism. The same buyer remembers taking a loss on an order of women's suits that was delivered with multicolored lapels -- a mistake, not a fashion statement -- because the supplier was another frequent dining pal of her boss. "You were told who to do business with," she says. "If the lapels came in different colors, you had to work it out."

The disparities between the sexes at J.C. Penney eventually cost Kay Baker her job.

In her last post with the company, Baker was responsible for marketing the company's furniture and home products by taking the sales pitch into customers' homes. Before Oesterreicher fired her, auditors alleged that she had deceitfully included three days' worth of sales figures in her division's year-end totals to trigger bigger bonuses for her and her staff. Baker, who earned more than $210,000 a year in salary and other bonuses, would have reaped $890 personally with the alleged book-cooking.

During three years of subsequent litigation, the company's lawyers succeeded in booting Baker's claims from state and federal courts. J.C. Penney insisted that Baker abide by an agreement she and all other company employees signed in 1995 consenting to arbitrate workplace disputes. Even so, the Penney side fared poorly in the private arbitration.

Arbitrator Steve Rusuck wrote in his decision that he was "not convinced that [Baker] knew or believed that by moving or leveling sales figures, she was knowingly or willfully committing acts that were contrary to company policy." He also said he was "concerned that [J.C. Penney] took such draconian measures against a 31-year employee, especially since there was no evidence that such harsh disciplinary action had ever been taken against any other J.C. Penney employee."

Maloney contends that Baker was owed much more than what the arbitrator awarded. He argues in an appeal to the American Arbitration Association that Rusuck mistakenly denied Baker's defamation claims, which allege that the company essentially called her a thief in public. The national association rarely overturns an arbitrator's decision.

Maloney argued at the hearing that had Baker's rise continued at the pace set during her career, she would have become a top executive serving on the board and eligible for much richer stock benefits and compensation.

Her climb up the corporate ladder had indeed been steady.

At the age of 15, Baker sought her first job at a small J.C. Penney store in Oklahoma City, where her parents had moved after her birth in Guthrie. "My mom always bought my dad's clothes at Penney's, and I shopped a lot there, and so I...decided to go ahead and put my application in just [so] I could get work in the fall when I turned 16," she testified. She was hired immediately to work in the stock room. When she turned 16, the store managers put her on the sales floor.

As a college student, earning a home economics degree from Oklahoma State University, she continued working at the J.C. Penney store in her hometown during summers. The second weekend after she graduated from college, she returned to J.C. Penney as a management trainee assigned to women's accessories and wigs in the Oklahoma City store. By the mid-'80s, she had moved to the district offices in Tulsa, then on to Dallas and New York.

In the early-'90s, Baker directed the corporation's special events and public relations. She would travel with W.R. Howell, then chairman, when he made appearances in Washington, D.C., at J.C. Penney Golf Classic events, and at overseas meetings with international dignitaries. She also helped organize a corporate publicity campaign called, ironically, "The Spirit of the American Woman."  

Baker testified that her bold ideas for the campaign prevailed with then-chairman Howell over the objections of Oesterreicher, who was chief operating officer. She suggested having J.C. Penney sponsor Lynn St. James, a female Formula I race car driver.

"She represented the spirit of the American woman in a male-dominated [field]," Baker said. "I went through the thing on why we should do this and consumer perception and this will be a good thing to do.

"And Mr. Oesterreicher looked at me and shook his head, and he looked at Mr. Howell and he says, 'We don't sell cars or motor oil. What are we doing this for?'

"And Mr. Howell looked at him and he said, 'It has nothing to do with what we're selling -- it has do with who we are, that we believe in people and we support people.'"

Baker obviously relished the memory of her triumph over Oesterreicher. Howell, she said, later received letters from women who wrote that they hadn't shopped at J.C. Penney for 20 years but had been prompted to do so because of the company's "belief in women" and its support of St. James.

By August 1995, management asked Baker to rebuild the custom-decorating department, which had been losing money. The department fell under the supervision of Tom Hutchens, then-president of merchandising. His was the ultimate voice in what products J.C. Penney would market nationwide.

"[It] was the very first time in my entire career I reported to Tom Hutchens, and six months later I was fired," Baker told the arbitrator.

In her testimony, Baker offered details about the harassment that she claimed began began 10 years earlier, when she first met Hutchens in New York. Hutchens, who was married, asked her out for a drink, Baker said. She declined.

The proposals continued through the early '90s, she said. "We were at the same university [executive] program. I was the only woman there," she said. "He calls me late in the [night]: 'Why don't you come down to the room and have a drink?' Well, I just really felt uncomfortable about doing that. Thanks but no thanks."

He was blatant, according to Baker. "I remember one time I was sitting at the table with him at the Penney Golf Classic...His wife was across the table, and I was seated next to him, and he was rubbing my leg. The man is just a pig, and I'll just leave it at that. But...I've been around the company a long time. Just blow it off and move on."

Even her bid to get Penney to sponsor St. James led to a confrontation with Hutchens. At an award ceremony put on by the Women's Sport Foundation after the company started backing St. James, several top J.C. Penney male executives, including Hutchens, left the event early, abandoning Baker and another female executive. "The men had left the function to watch a ballgame," Baker recalled. "It was kind of embarrassing, because we were the front tables of the room."

Hutchens asked her later that evening to come to his room in the corporate apartments so he could explain the sudden exodus. "I knocked on the door...He said, 'Come on in,' and when I went in there, he was there with shirt...and...bow tie on in his underwear rubbing his leg. I said, 'Tom, we'll discuss this when we get back.' I just left."

Why hadn't she filed a sexual harassment suit against Hutchens years ago? her lawyer asked. "I didn't survive for 30 years by running to somebody every day," she said. "He didn't affect my position. I never reported to him. He was harmless. When these encounters happened, he was drunk...that's his reputation."

When Baker learned in late 1995 that she would be reporting to Hutchens, she had another uncomfortable run-in with the top Penney executive. "He put his arm around me and said, 'I'm finally going to get you under me, aren't I?'" Baker said.

Weeks before Baker was fired, she was told that she had crossed Hutchens and that he allegedly had targeted her. She had aligned herself politically with Hutchens' rival in the company, John Cody Jr., the former chief operating officer. Cody last January and declined to be interviewed for this story.

Oesterreicher had put both Cody and Hutchens in line for what amounts to the No. 2 job at J.C. Penney. Cody had mentored Baker, and in early 1996 he asked whether she wanted him to try to move her to a store management position. Executive slots were going to be reshuffled, and she would benefit in terms of a promotion if she had top-level field experience.  

Soon afterward, Randy Ronning, now president of catalog and logistics, told her that Hutchens was livid, Baker testified. "He said, 'You're in cahoots with Cody against him, and he's furious with you, and I don't know what I'm going to do to calm him," she said. "You don't want to tick Tom Hutchens off. He can be a very mean person.'"

Shortly after that, Baker was asked to participate in an audit of her division. Her subordinates had mistakenly included three extra days in their sales totals that belonged in the next year. The false increase meant the division would meet sales quota requirements and get bonuses. Without the additional days counted, they would not.

Only a few days before those allegations arose, the CEO had distributed a memo praising Baker for transforming the custom-decorating department into a $10 million profit center.

Three years later, arbitrator Steve Rusuck would conclude that Baker did not knowingly or willingly falsify records.

In the end, J.C. Penney fired a successful female manager for no apparent reason. Meanwhile, the man she accused of sexually harassing her has been moved into a job that paid him $630,000 last year.

It's worthwhile to note -- for those hoping that the newcomer can work miracles on the bottom line -- that Castagna and Hutchens are comparably ranked on the corporate ladder.

At the telephone conference with stock-market analysts this week, Castagna sounded truly exasperated even before the questions began. "My first 90 days at J.C. Penney have truly been challenging," she said in her opening statement.

The sigh that followed made one think she truly meant it.

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