A Penney Saved

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

At that point, the company immediately committed all of the $3.5 billion proceeds to share-buybacks, plus $1.1 billion of its cash to debt reduction. “I think the degree of debt reduction is sufficient to produce pro forma credit measures that are comparable to or better than some of the other BBB- rated retailers,” says Gimme Credit’s Evan Mann. Fitch now rates Penney BB+, a notch below investment grade, and both Moody’s and Standard & Poor’s have improved their outlook for the company. But despite the huge deleveraging — debt-to-capital ratio dropped from 51 percent to 34.6 percent — Penney is not out of the woods. “The agencies are going to wait and make sure the company’s operating performance stays solid,” says Mann.

On the Rack

Therein lies the challenge. On October 5, analyst Klinefelter downgraded the stock from Buy to Neutral, predicting that “JCP market-share gains will likely slow as other moderate retailers catch up.” Two days later, the company announced that September department-store sales had grown just 2 percent, citing record-high energy prices as a contributing factor. October sales also grew 2 percent.

On October 27, the company selected Ullman as the new CEO. Although an official search for Questrom’s replacement had been under way for some time, he was not expected to step down until September 2005. (Ironically, Ullman was CEO of Macy’s in 1994, when Federated took it over in a hostile bid led by Questrom.)

Analysts were surprised that Wal-Mart veteran and merchandising expert Vanessa Castagna, who had served under Questrom as CEO of Penney stores, as well as of its catalog and Internet operations, was not selected for her boss’s job. The choice of retail veteran Ullman, whose last position was CEO of luxury-goods purveyor LVMH Moet Hennessy Louis Vuitton, suggests a continuing emphasis on building exclusive brands.

Questrom called Ullman’s experience with brands critical. “[Brands] are a bigger and bigger issue in retail because of the clutter we have out there,” he said. Ullman’s brief remarks to analysts focused on taking Penney’s revitalized and new house brands “to the next level.”

Indeed, it’s not clear what comes next. Just before Questrom announced his early retirement, CFO asked him where Penney’s future growth would come from. He said his sights still were set on taking market share from competitors, noting that the improvements Cavanaugh funded are only just taking hold. “We are one of the few [retailers] that has had top-line growth without adding a lot of stores,” he said. “We can continue to do that for the foreseeable future.”

Indeed, Penney’s expansion plans are relatively modest. It opened 10 off-mall stores this year, and officially plans about 75 over the next several years. Kohl’s, with no base of mall stores, is planning to add 500. From a big-picture perspective, Questrom conceded that “the retail business is limited in its ability to come up with new ideas and to create new products.”

He’s right. In both his interview with CFO and in his subsequent retirement announcement, Questrom cited the Internet and off-mall stores as the two “new strategies in place that were not so visible when this [turnaround] program started.”


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