A Penney Saved

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

Yet neither strategy is particularly new.

Internet sales generated more than $600 million for Penney in fiscal 2003, and are expected to top $1 billion in fiscal 2006. Although to some degree these sales simply compensate for the decline of the company’s paper-catalog business, Penney executives argue that tight integration with its stores provides a competitive edge. “Customers who order online can pick up and return goods to the store if they choose,” says spokeswoman Carolyn Covey Morris. They can also place orders online at a store, she says, noting that the Website might have 50 available sizes to the stores’ 10. S&P’s Asaeda says Penney’s multichannel approach gives the company more ways to reach customers than its rivals enjoy — at least for the time being.

The off-mall concept, epitomized by rival Kohl’s, falls into the category of “everything old is new again.” In theory, some customers find such stores more convenient than malls. In practice, the market for new malls is stagnant, so adopting an off-mall strategy allows Penney to open new stores when and where it likes — just as it did in the days before malls.

Questrom has chided analysts for not taking the strategy more seriously, saying, “This is a better deal than we thought it was.” He suggests that the company might add as many as 200 off-mall stores, depending on customer demand. But Penney is hardly alone in adopting this idea: Sears recently purchased 50 stores from Kmart and leased 6 more from Wal-Mart as sites for its new, off-mall Sears Grand concept. “It’s ironic that Sears, among others, seems to be imitating Kohl’s with its off-mall format just when Kohl’s sales are languishing,” notes Gimme Credit’s Carol Levenson. (By selling food in addition to other goods in these locations, Sears appears to be copying Wal-Mart, too.)

When pressed about the future, Cavanaugh is quick to note that Penney’s turnaround isn’t finished, and won’t be until the company consistently generates sales and operating profits of 6 to 8 percent or better. He and other executives, including Ullman, emphasize that newly introduced brand lines have a long life cycle, and the company is devoting substantial advertising dollars to promoting them. Beyond that, he says, “our focus will remain on refining and capitalizing on the things we know — the mall and off-mall stores and the catalog and Internet businesses.”

Cavanaugh would not speculate on what a new CEO means for his own future, although he notes that “our financial situation was significantly different, in a negative way,” when Questrom appointed him. Indeed, in his first call with analysts, Ullman cited the company’s financial strength as “a huge asset.” Ullman, adds Cavanaugh, “indicated that generally his style is not to make broad, sweeping changes.”

The same could be said of the department-store business in general, where the focus remains on getting the selection of products just right. “Conceptually, retailing is an easy business,” says Cavanaugh, quoting his departing boss. “The challenge is in the execution.” With more than 200,000 items and 1,020 stores, he says, “we’ve got huge permutations and combinations.” Getting the right products in the right amounts and right styles takes tremendous work, says Cavanaugh. “But customers don’t care about all that,” he says. “They just want the right product in the right place in the right style.” And if both the teen T-shirt buyer and the bedding customer see that when they walk in, says Cavanaugh, “then the balance sheet, the capital structure, and free cash flow will take care of themselves.”

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