J.C. Penney shows oomph at age 100

Department store chain has some success under new CEO's restructuring

October 06, 2002|By Gus G. Sentementes | Gus G. Sentementes,SUN STAFF

For decades, mass retailers and specialty chains have been poaching customers from J.C. Penney Co. Inc. and other department store chains. With their survival at stake, department stores are fighting back.

For Penney, that has meant embarking on an overdue restructuring program that has shaken up the retailer from top to bottom.

The retailer, which also owns the Eckerd drug chain, took more than $500 million in charges over the past three years as it closed hundreds of department stores and pharmacies, revamped internal operations and refocused its merchandise strategy.

"We had to make a 180-degree change from the way we ran our business to the way we're running it today," said Allen I. Questrom, Penney's chairman and chief executive officer. "It was something we should have done in the '50s or '60s."

The plan appears to be paying off for the Plano, Texas, retailer.

Instead of losing 10 cents a share, as analysts had predicted, Penney lost 5 cents in its second fiscal quarter, which ended July 27. And that was down substantially from the 20-cent loss in the second quarter last year.

Over the past year, Penney has regularly bested most of its peers in posting monthly sales gains at stores open at least a year - a key indicator of a retailer's health.

Retail analysts and experts aren't yet ready to write the chapter on a Penney rebound, but they like what they've seen so far.

They credit Questrom, a retail veteran who joined Penney in August 2000, for putting the 100-year-old company on a five-year turnaround track that's already showing results.

Among the big changes he made after coming aboard was replacing six of the eight heads of Penney's major divisions.

Lori Wilking, a retail analyst with H&R Block Financial Advisors in Detroit, believes Penney's new leadership has "done a great job. They're highly focused on what needs to get done and how they're going to get to it. ... They're really on track."

With restructuring and other one-time charges related to turnaround plans, Penney posted a $705 million loss for the 2001 fiscal year, a drastic decline from a decade-high $1.06 billion profit in fiscal 1995.

Questrom also put the struggling Eckerd division on a three-year turnaround track. This involves a new store format, better pricing, plus store renovations, relocations and closures.

The drugstore chain has 2,642 stores throughout the Northeast, Southeast and Southwest and accounted for $13.8 billion of Penney's $32 billion in sales last year.

But Penney's department store business has faced the most changes.

Penney has focused heavily on improving customers' shopping experience at its 1,068 department stores, installing new in-store signs and easily seen customer-service "clusters" where employees ring up purchases.

Similar move at Sears

Sears, Roebuck & Co., the No. 1 department store chain in terms of sales, is rolling out similar central checkout stations - plus shopping carts - in its stores and has renewed its emphasis on power tools and appliances.

And Sears, with 870 stores and $41 billion in sales last year, also beefed up apparel offerings with the purchase of catalog retailer Lands' End for $1.9 billion in June. Beginning this fall, Sears plans to introduce Lands' End clothing, footwear and accessories in its stores in 10 markets with a complete storewide rollout expected by fall next year.

Last year's demise of Montgomery Ward after 129 years in business underscored the risk that faces old retailers like Sears and Penney. All three shared roots in catalog businesses at a time when America was largely rural.

But now they are facing competition from upstarts like Kohl's and Target Corp., which have driven home lessons in fashion merchandising and customer convenience, retail experts said.

"I call those companies change drivers," said Lois Huff, a vice president for Retail Forward Inc., a retail consulting group in Columbus, Ohio. "They've really caused a lot of retailing to stop and pay attention, and take action. And that's something that department stores like Penney and Sears didn't do for years ... because they could get away with it."

Penney is getting better at having more of the right merchandise in its stores, analysts said.

For instance, the Penney store in White Marsh Mall - one of six in the Baltimore metropolitan area - may now carry a smaller selection of merchandise, but it's stocking more of what customers want to buy, according to store manager Ben Bjerke.

"We tend to run out less now," said Bjerke.

The company is mostly finished with the centralization of its buying, marketing, merchandising and information technology operations - a move that should have been accomplished decades ago, Questrom said.

Decisions once made at the store level - such as what kinds of products to stock and how much of each - are now made at Penney's home office by a centralized buying team.

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