When J.C. Penney Co. reported a 5 percent jump in same-store sales and a 66 percent rise in profits for 2004, it provided the final proof that the turnaround begun by retired CEO Allen Questrom five years ago has been a solid success.
Today, the chain is showing rare strength in a field where most of its competitors are answering questions about slumping sales, and considering mergers. Department stores are continuing to lose market share to big boxes and discounters. Some firms, such as Sears, Roebuck & Co., Dillard’s and Saks Inc., are wrestling with the common problem that the firms’ real estate is worth more than the retail operations. But Penney’s sales are rising and the chain is now charting a plan for continued growth.
Mall owners are joyous. “Nothing warms the cockles of the developer’s heart like having a retailer return from the edge of the abyss and become a viable candidate as an anchor again,” says Michael McCarty, senior vice president with Simon Property Group Inc. in Indianapolis. Simon has 118 Penney stores totaling 17 million square feet in its malls, ranking it third behind Sears and Federated among Simon anchors.
This year, Penney plans to build additional 90,000-square-foot, one-story off-mall boxes and eight mall stores. “It’s my understanding that they still plan on being a mall-based department store with the regional malls around the country,” says Michael Treadwell, senior vice president of development with Macerich Co. subsidiary Westcor in Phoenix. But Penney thinks it ultimately will open 200 freestanding locations to complement its mall base.
Speaking at the International Council of Shopping Center’s Open-Air conference in February, Paul Freddo, Penney vice president and director of real estate, said the now spry centenarian embraced the lifestyle center concept and it is looking at potential sites. The ease of parking and ability to enter stores from the street adds to its appeal, since most shoppers are browsing less and power shopping for specific items more.
Given Penney’s size and draw, says McCarty, developers can build lifestyle centers bigger.
Penney’s relationship with developers wasn’t always so friendly.
Simon, for example, was a worried landlord five years ago when Penney’s monthly same-store sales were flat or negative, and core shoppers were fleeing to discounters for convenience and to more upscale retailers for style. Penney’s was where Mom and even Grandma shopped—but not where her stylish middle-class working daughter went.
Questrom, who was responsible for retooling Neiman Marcus in the 1980s and bringing Federated Department Stores Inc. out of bankruptcy in the early 1990s, came in and closed 130 stores, hammered the kinks out of the supply chain and focused closely on what shoppers wanted: more open space and trendy fashions.
Penney set out to win what it calls “the driveway decision”—to be the store shoppers think of first when backing out of the garage.
This matters for malls since Penney and malls target the same shopper. Research conducted under Questrom found that the typical Penney shopper is married with kids and a median household income of $69,000. She shops Penney’s for home and family—but was going elsewhere for herself because she wasn’t finding the style.
Penney spent $300 million during the past four years to improve merchandise presentation, lighting, space allocation and fixtures. It reduced and simplified store staff’s workload, dropping redundant pricing and signing activities and buying wireless scanners to boost productivity. More merchandise now arrives floor-ready, eliminating up to three days of back-room prep. “Stores look cleaner. They’re brighter. Merchandise is displayed better in terms of shelving,” says David Szymanski, director of the Center for Retailing Studies at Texas A & M University in College Station, Texas.
The biggest change Questrom effected was to centralize the company’s merchandise strategy. Penney, founded in 1902, was from the old school: Store managers still did the buying and set prices, an outmoded practice in this era of national marketing campaigns.
So Questrom streamlined buying and marketing and focused on quality and price with private labels such as Worthington and Arizona. Private brands now generate 40 percent of Penney’s sales. Meanwhile, its heritage of basics—socks, underwear, jeans, khaki pants, bedding and bath—make up another 40 percent. Penney has improved its in-stock performance for basics to 98 percent, up from 90 percent in 2002, adding sizes, colors and styles.
Under Questrom, the chain also smoothed seasonal transitions, moving the new in and the old out faster, and closing outlet stores that liquidated dated merchandise. Thirteen new distribution centers and a new transportation-management system speed merchandise from suppliers to warehouses to stores 25 percent faster.
He also found a solution to Penney’s drug problem. The chain was struggling with its Eckerd drugstores, which it purchased in 1997. But after a few years of tweaking that concept, Questrom was able to unload the chain in a $4.5 billion deal with CVS last year. It used $3.5 billion of those proceeds to buy back its own stock and paid off $1 billion in debt. Overall, the company has been able to substantially deleverage its balance sheet lowering its debt-to-capital ratio from 51 percent to about 35 percent.
By the time Questrom retired for unspecified reasons in December and joined Sotheby’s Holding Inc.’s board of directors, Penney was once again an important player. Sales per square foot rose to $143 in 2003 from $128 in 2000, a noteworthy gain for a mid-price department store. The plans that Questrom put in place, which are now being executed and expanded on by Mike Ullman, his replacement, seem to be working. Ullman was an executive with luxury retailer LVMH Moet Hennessy Louis Vuitton. He was brought in to continue Penney’s off-mall push as well as strengthen its exclusive brands.
Wall Street approves. Penney’s share price in late February was up 175 percent over where it was five years ago; the industry rose just 16 percent in the same period. Its year-end results led several analysts, such as Deutsche Bank Securities and Merrill Lynch to upgrade the stock to “buy” ratings and raise their price targets for the stock. Analysts believe the company’s stock, which was trading in the mid-$40s at press time, is really worth up to $55 per share.
Another sign of the company’s health is that Moody’s Investor Services and Standard & Poor’s have been raising Penney’s debt ratings. At junk status during the company’s dark days, the firm’s debt is now just one notch below investment grade.
The retailer’s year-end results underscore the strength of its turnaround. Now it’s looking to improve even more through its “Box One” concept, Penneyspeak for its new 90,000-square-foot off-mall stores. Box One provides Penney with entrée into hot areas where there is no appropriate mall—be it strip mall, community center, lifestyle center or standalone. Penney now has 10 off-mall stores with plans for 12 more this year and 75 to 100 in two years. Its total store square footage will rise about 1 percent in 2005. About 80 percent of its 1,017 stores are in malls.
Penney projects sales of $200 per square foot for its Box One stores. The byword is convenience: shopping carts, wider aisles and longer hours, typically 8 a.m. to 10 p.m. Merchandise is the same as at the older stores, except the new format doesn’t carry furniture.
So what next? Penney, taking a course between low prices and high fashion, reaffirmed its traditional middle-income shopper with a splash in late February, touting its line of “dressy casual” women’s clothes from celebrity designer Nicole Miller.