The long-promised turnaround of Eckerd Corp., the Largo drugstore chain and one-time star subsidiary of J.C. Penney Co., is sputtering. And Wayne Harris, hired nearly three years ago to make Eckerd a real player in an industry full of bigger and tougher competitors, was plainly apologetic Tuesday about his company's recent performance - and for taking his eye off the ball.
"First, let me say I am disappointed in the Eckerd operating results after two years of improvement," Harris said in a telephone conference detailing J.C. Penney's quarterly performance. While Penney's stores gained strength, Eckerd weakened. (For financial results, see 2E.)
Harris even bit the bullet and thanked Wall Street analysts for pointing out how Eckerd stores had failed to monitor and respond to price cuts adopted by such drugstore giants as Walgreen and CVS.
That's when he said, "Shame on me and shame on us."
J.C. Penney CEO Allen Questrom, Harris's boss, shared blame for Eckerd's stumble. "We screwed it up," he acknowledged. "We fogged out and thought we were doing better than we were."
With so much humble pie served up Tuesday, there are sure to be leftovers. That might come in handy later this year - given Eckerd's forecast for a challenging second half - unless Questrom can kick Harris to kickstart Eckerd back into higher gear.
Eckerd's overall sales grew by 2.3 percent in the second quarter, but its same-store sales fell dramatically and its operating profit dropped by more than 25 percent. In addition to poor product pricing, Eckerd still suffers from a lack of prime store locations and poor inventory management.
Other drugstore chains look stronger. Eckerd competitors, especially Walgreens and CVS, have posted strong single-digit same-store sales gains this year.
These are no idle competitors. Walgreen's market capitalization is six times the size of J.C. Penney's, including Eckerd. CVS's market cap is 2.5 times that of Penney's.
"Our results over the past six months are not at all acceptable," Harris said.
What a coincidence. Seven months ago, I spent an entire day listening to Harris and his top managers selling a flashy new Eckerd strategy to 90 financial analysts gathered at the Westin Innisbrook Resort in Palm Harbor.
It sure sounded good, had Eckerd delivered on what it promised.
In January, Eckerd told Wall Street how it was expanding and pushing into the Arizona and Denver markets. Eckerd was remodeling its stores to be more eye-catching - but also more mazelike to herd customers through more aisles in order to reach the pharmacy. Eckerd was automating some of its pharmacy services and building prescription sales as a key foundation of its business.
There's more. Eckerd also was adopting an in-house inventory management system dubbed "quantum leap" to reduce the tendency toward empty store shelves. Eckerd was expanding and pushing sales of beauty and cosmetic products, while its photo department jumped to the cutting edge by embracing digital camera services.
It's not coming together yet. Harris said Eckerd has taken a "short hiatus" on remodeling older stores and will focus on new store openings. The chain is facing a drop in film sales and photo processing. And customer surveys show Eckerd is slipping in "convenience" as competitors open stores in better locations and siphon off business. Stores in Florida and Texas saw the biggest decline in consumers' perception of Eckerd's convenience.
Seven years ago, Penney agreed to acquire Eckerd for $3.3-billion and merge it with Penney-owned Thrift Drug Stores. That created what was then the nation's second-largest drugstore chain. Penney and Eckerd could not have appeared more compatible.
"The opportunity to buy one of the premier drugstore names in the country and become the nation's second-biggest chain does not come along too many times," Penney said in 1997. "These two companies are an incredibly good fit."
Penney bought Eckerd as a growth engine, but now the roles are reversed. Eckerd has slipped in size to become the nation's fourth-largest drugstore chain. Penney's shares are down some 30 percent since the beginning of the year, closing at $17.76 on Tuesday.
Investors used to think Penney would strengthen Eckerd, then spin it off at a handsome price. That's not in the cards any time soon.
For Harris, whose turnaround clock is ticking loudly, Eckerd is really fighting to deliver one thing to consumers: greater convenience. "Convenience is the number one reason most shoppers come to drug stores," said Harris.
The good news is that Eckerd, with remodeled and relocated stores, is now considered more convenient than it used to be. The not-so-good news is that fast-expanding Walgreen, CVS and other chains are viewed as offering even greater convenience.
"The whole industry is improving," Harris said. "And we have to continue improving more rapidly."
That's one prescription that will be tough to fill.
