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The closings are part of a wider restructuring in which Penney will shut 45 of its department stores.
By MARK ALBRIGHT
© St. Petersburg Times, published February 25, 2000
Still struggling to get back on track, J.C. Penney Co. Inc. on Thursday outlined more broad cost-cutting that includes closing 45 unprofitable department stores and 289 Eckerd Drug stores.
The nation's sixth-largest retailer also put off until the second half of the year a plan to spin off its Largo-based Eckerd Corp. drugstore chain as a separate "tracking stock."
The delay -- the second since the planned tracking stock was announced nine months ago -- came amid concern that separating the performance of the two retail companies might further erode investor confidence in the parent company, which has lost $16-billion of its market value since 1998.
J.C. Penney has been trying for two years to invigorate its department stores, which have been losing a fight over the moderate-priced apparel business to an array of discount stores.
The company's latest round of belt-tightening came as Penney reported a loss of $12-million, or 8 cents a share, for the fourth quarter thanks to a onetime $530-million charge for the store closings. Even without the onetime charge, Penney fell 2 cents a share below analysts' earnings estimates of 47 cents a share. The company's fourth-quarter loss compares with a profit of $207-million, or 78 cents a share, in the year-ago quarter.
While many retailers prospered during the critical Christmas season, JCPenney stores languished. Sales declined 1.6 percent to $6.1-billion in its department stores during the fourth quarter over the same quarter a year earlier. The performance was offset somewhat by Eckerd posting a 20 percent revenue gain. But Eckerd's operating profit slumped to $74-million, down from $104-million a year earlier. Eckerd blamed tougher prescription pricing by health insurance companies and previously announced changes that more accurately account for inventory lost to paperwork errors, shoplifters and employee theft.
"I'm not pleased with the results," Penney chairman and CEO James Oesterreicher said. "We've still got a lot of work to do."
Wall Street, which already had beaten Penney's shares down to a price only eight times earnings, was not impressed with the restructuring. Penney's shares closed Thursday at $16.183/4, down 683/4 cents.
"I'd be more excited if they were more aggressive in weeding out the money-losing stores," said Richard Church, a securities analyst with Salomon Smith Barney.
In fact, the 45 department stores being closed by the end of this year are a fraction of the chain's 1,150. Two years ago Penney closed 75 stores in an earlier round of cost-cutting.
Penney said it would not identify the stores that face closing for up to three weeks.
The 289 Eckerds being closed represent about 10 percent of the chain's 2,900 stores. Virtually all of them are undersized stores acquired with smaller regional chains scattered across the Northeast and Southeast. Many are in Georgia, New Jersey, Pennsylvania and New York state. Of the 23 being closed in Florida, where Eckerd has more than 500 stores, only two are in the Tampa Bay area. The company did not identify the exact locations.
"These are the chronic underperformers," said Frank Newman, president and chief executive of Eckerd Corp. Closing the drugstores and offering transfers to employees will add about $20-million to Eckerd's annual operating profit.
Eckerd also is slowing down its aggressive program to replace older stores in shopping centers with stand-alone stores at key intersections that have generated more business. This year Eckerd plans to open 200 new stores, 150 of them relocations. That's about two-thirds of the pace of 266 new stores in 1999. Newman said the slowdown was an issue of finding the right real estate, not money.
Meanwhile, Penney is changing the way it does business to cut another $120-million in costs this year. That includes replacing its old way of stocking stores. One staff at the company's headquarters will decide what to stock instead of small staffs of buyers deployed in each store.
J.C. Penney also hopes to boost profits and avoid big price markdowns by chopping back its merchandise inventory by 8 percent through 2000.
"The real issue isn't the size of the inventory, but the content," said Vanessa Castagna, the former Wal-Mart executive recently hired as Penney's chief operating officer of merchandising.
The tracking stock plan would involve selling 20 percent of Eckerd's equity in the form of non-voting shares. By doing so, Penney hopes to raise cash to retire some of its own outstanding shares while giving investors an option of investing only in the drugstore side of the business. Officials think they need two consecutive quarters of improving performance by Eckerd and Penney before they can sell Wall Street on separate tracking stocks.
The tracking stock is the last part of a plan to reduce Penney's debt and boost its stock price. The company last year paid down much of its debt with the $4-billion GE Capital Group paid for Penney's credit card business.
For the fiscal year that ended Jan. 29, JCPenney's earnings dropped 43 percent to $336-million, or $1.16 a share, down from $594-million, or $2.20 a share, in the previous year. Revenue increased 6.7 percent to $32.5-billion, up from $30.5-billion.