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Overhaul puts JCPenney on track

With lots of cash, distracted weakened competition and a new direction, the company seems poised to flourish.

By MARK ALBRIGHT
Published May 21, 2005

PLANO, Texas - A lot has changed at J.C. Penney Co. in the past year.

The department store giant was caught up in the angst, turmoil and big losses of unraveling its ill-fated Eckerd Drug venture last May while assuring impatient shareholders that its own comeback was well under way.

When shareholders gathered for the company's annual meeting here Friday, however, Eckerd was somebody else's problem, the chain was sitting on a mountain of cash and the new management team predicted department store industry turmoil will start working to JCPenney's advantage.

Indeed the big players in the moderately-price apparel world are facing some very unsettling distractions.

Kmart and Sears Roebuck and Co. are in the painful throes of making their once-improbable merger work. Federated Department Stores Inc., which owns Macy's, is swallowing its biggest rival May Department Stores Inc. Saks Inc, which operates a dozen chains, is casting off less profitable divisions and is knee-deep in an SEC-inspired accounting probe that cost the brother of chairman and CEO Brad Martin his job.

Against that backdrop JCPenney, which has spent the past four years overhauling the way it does business, has comparatively clear sailing. The chain also is armed with $4.7-billion in cash and in the past year bought back $2.1-billion in outstanding shares and retired $1.7-billion in debt.

The company plans to spend $2.4-billion renovating stores and accelerating the pace of store construction by a factor of four over the next five years.

"We see all this industry turmoil as a tremendous opportunity," said Myron Ullman, a veteran retailing executive who took over as chief executive a few months ago. "It gives us an opening to become the preferred shopping choice of Middle America."

Ullman, whose mobility has been restricted by a spinal injury, scoots around the company's sprawling marble-floored headquarters on his a two-wheeled Segway. But that has hardly slowed this well seasoned retail executive. He ran R.H. Macy & Co., then the world's biggest chain of Duty Free Shops and most recently was group director at the luxury house LVMH Moet Hennessy Louis Vuitton.

But Ullman promises not to take JCPenney upscale while making the chain's once-dowdy apparel offering more fashionable at a sharp price.

He hopes a steady drumbeat of advertising and compelling merchandise will "make an emotional connection" with shoppers age 35 to 54 in households with $35,000 to $85,000 annual income.

Long-term shareholders who have been on a wild roller coaster ride the past few years like what they heard.

Adding credence was a runup in JCPenney's stock price, which soared 60 percent in the past year. Penney shares closed Friday at $50.67, down 43 cents, on the New York Stock Exchange.

While most of the runup is a result of the company's improved performance, some of it was triggered by takeover speculation drawn to that unspent cash in Penney's bank account. Industry trade papers have been rife with rumors that private equity firms will bid to take JCPenney private like they recently did with Neiman Marcus and Belk. Ullman declined to comment on the rumors.

Analysts don't count out a bid, but are dubious. Deborah Weinswig of Citigroup/Smith Barney said it's just as likely JCPenney will bid to make an acquisition itself, a sentiment expressed in trade papers that now see JCPenney buying Carson Pirie Scott in the Midwest from Saks Inc.

Shareholders are just happy the good news outweighs the bad.

"I thought my life was all over when the stock dropped to $8 a few years ago," said Bob O'Toole, a 91-year-old retiree who started his 36-year career with the company in 1948. "These guys have the company back on the right path. I still cannot get my daughter to shop JCPenney instead of Neiman Marcus. But my granddaughter goes to JCPenney."

About 40 percent of JCPenney's business is private label, and the company has been turning to bigger name design labels to seize on lifestyle trends. The most recent are are nicole, a line by Nicole Miller; and Nick(it), a young menswear creation of Nick Graham, the promoter behind Joe Boxer.

The company also came up with W, a casual work clothes line spun from its Worthington label.

Repeated waves of cost cutting and store closings pretty much left all 1,000 JCPenney's stores in malls. The company is now among the first department stores to go back into new outdoor shopping centers. The first new standalone Penneys in Florida is under construction at the Shops of Wiregrass in Wesley Chapel.

As a major mail order house before the dot.com boom, the company had a leg up on competitors. Its online shopping site did $800-million in sales in 2004, and Ullman said it will break $1-billion this year.

The company is trying to blend the Internet into its stores. Products ordered online can be picked up at a JCPenney store or delivered.

A test of letting customers noodle with personal computers tuned to jcpenney.com on the sales floor was dropped. Nobody used them.

Instead the company is installing LCD screens that will be linked to the Internet site at each of its cash register stations by the end of 2006.

The $250-million investment means clerks will be able to quickly access for shoppers any size, color or item offered by the company at the checkout counter. The displays will show pages of the online shopping site.

"It will be 35,000 more touch points to our online shopping service inside our stores," Ullman said.

Mark Albright can be reached at albright@sptimes.com or 727 893-8252.

[Last modified May 21, 2005, 01:03:17]