A Penney Saved

A deft turnaround buys time, but what's in store long-term for the venerable retailer?

The journey from adolescence to middle age takes about 15 steps for shoppers at the Stonebriar Mall’s J.C. Penney — the distance between the pile of Beavis and Butthead T-shirts and a luxurious, overplumped bed decked out in matching shades of sage.

As in life, though, the gulf seems much wider. Plasma TVs surround the neon-lit “tween” clothing section, pumping out music videos from dance-hall DJ Beenie Man and teen pop vocalist Katy Rose. It’s brighter — and much quieter — at the nearby bedding display, where Bruce Hornsby’s “Mandolin Rain” wafts from hidden speakers. It would be easy for a customer visiting either section to completely ignore the other.

This bit of display magic is just one example of Penney’s effective effort to revamp its stores and store brands (such as designer Chris Madden’s bedding collection) and bring customers, including younger ones, back after years of company decline. Yet the Stonebriar Mall store, a five-minute drive from Penney’s Plano, Texas, headquarters, also illustrates the challenges the company faces. The mall boasts a Sears, a Nordstrom, and a Macy’s, as well as numerous specialty stores. Just down the road sits a stand-alone Kohl’s store.

“It is very difficult to command loyalty,” says newly hired Penney CEO Myron Ullman. “Right now I would argue that in the core department-store business in the mall, [customers choose] whichever store has better parking.”

Ullman officially assumes the CEO role this month — four years into a five-year effort to make Penney more than a convenient entrance to the mall. Led to date by retail veteran Allen Questrom, Penney’s turnaround is widely regarded as an industry success story. But Ullman’s accession was greeted by a 7 percent drop in stock price and questions about the company’s future plans. Investors, it seems, know how hard it is to hold customers’ attention in an industry that’s as crowded as a jewelry counter on December 24 — and dominated by the behemoth that is Wal-Mart Stores.

Finance Follows Fashion

Penney’s ongoing “turnaround” is not driven by a dire liquidity crisis. Although the company lost its investment-grade rating in 2000, it has plenty of cash. At the end of 2003, its coffers boasted a $3 billion hoard that equaled 55 percent of Penney’s long-term debt at the end of 2003. Even CFO Robert Cavanaugh describes the turnaround first in nonfinancial terms. “It was the fashion content that needed to improve dramatically,” he says. “We weren’t listening to the customer.”

Penney’s private-label brands were languishing, he says, and both house- and national-brand fashions were stale by the time they hit the sales floor. Worse, the company’s antiquated merchandising operations were delivering far too much of both. “We were what a merchant would call ‘overassorted,’ ” says Cavanaugh. “Too many products in each space — too many men’s dress shirts. We needed to edit.”

Ultimately, of course, Cavanaugh is still talking about money, not shirts. Private-label brands deliver higher profit margins (300 to 500 basis points, experts say) if they sell. The private-label brands also distinguish a store from competitors carrying identical national brands. “When J.C. Penney was offering the same assortment as everyone else, it could compete only on price,” says Jason Asaeda, retail analyst at Standard & Poor’s. Penney’s moderate-income customers, he says, “became accustomed to a discount.”

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