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Penney’s Recession Strategy

J.C. Penney Co. Inc. is scaling back on growth and stepping up product development this year to navigate the recession.

NEW YORK — J.C. Penney Co. Inc. is scaling back on growth and stepping up product development this year to navigate the recession.

The $19.86 billion chain is reducing store openings to 36, from 50, leading to a savings of $200 million in capital expenditures, Myron “Mike” Ullman 3rd, chairman and chief executive officer, said Tuesday during a dinner speech at the company’s annual analysts’ presentation at the Mandarin Hotel here. There will be 20 major store renovations, down from the 65 originally planned, and the retailer is “moderating” the inventory buy, which is generally purchased four to nine months ahead of the selling season, Ullman said.

However, Penney’s is accelerating product innovation, which, along with the capital expenditure savings, are key components of a “bridge plan” to get back on its “trajectory to accomplish long-range goals,” Ullman said.

Experiences with recent higher-priced private label or exclusive offerings, notably Ambrielle Lingerie and Sephora, have encouraged the retailer to “enhance the brand attributes of Penney’s power brands,” he said. With the Worthington and Stafford private labels, “we are currently working on brand enhancements.”

During the two-day presentation to analysts, which included a tour of the 133,000-square-foot, three-level store in Garden State Plaza in Paramus, N.J., executives discussed several initiatives in private brands, which account for 45 percent of the business. Among them:

l Xersion, a private label and the focal point for a new women’s active department, will launch in 600 stores this year.

l Decree launches for back-to-school. It is projected to be the chain’s second largest junior brand next to Arizona.

l Kimora Lee Simmons’ Fabulosity exclusive junior sportswear collection will roll out to 600 doors for b-t-s. Simmons’ reality show, “Life in the Fab Lane,” will feature the making of the collection in a June episode.

l The a.n.a. modern casual women’s brand will expand to petites and women’s sizes this spring, and Ambrielle will expand with plus sizes.

l Stafford, the private brand for the traditional male customer, this fall will introduce a business casual line.

Although retailers ranging from AnnTaylor Stores Corp. to Zale Corp. are aggressively closing stores, Ullman said, “We don’t see a major opportunity there.” During Penney’s turnaround years, the retailer closed more than 100 stores. “We currently don’t have stores that are not cash-flow positive,” Ullman said. Scaling back openings “doesn’t mean we are not committed to new stores. The new store opening program is essential.” Penney’s opened 85 off-the-mall units last year.

However, Penney’s has seen a downturn in sales since after b-t-s last fall. Executives have been candid about the lack of traffic at stores. And the Plano, Tex.-based chain last month slashed first-quarter earnings projections to 50 cents a share, down from the 75 to 80 cents previously forecast, after a tough Easter season. For the fourth quarter ended Feb. 2, profits fell 9.9 percent to $430 million. Sales declined 4.1 percent.

“We are well positioned to take the good times and the bad,” Ullman said, and no more promotional this year compared with last year. After 39 years in the retail business, “I don’t think I’ve been in an environment so unpredictable….For 2008 to 2009, there is a very difficult outlook,” he observed. “We really don’t know what ’08 and ’09 will look like.”

Ullman also gave an update on American Living, created by Polo Ralph Lauren Corp.’s Global Brand Concepts division exclusively for Penney’s. After launching advertising during the Academy Awards, the private brand is meeting expectations. Some of the merchandise is “wildly over” plan and some is disappointing. “The customer loves the quality, styling and the fit,” Ullman said.

Boys, girls and women’s merchandise, particularly dresses, and window coverings are the strongest sellers, while shorts and T-shirts across the entire store, and not just American Living, are weak, he said. Because the collection represents “less than 3 percent of [Penney’s] business, it’s not enough to move the needle.” Ultimately, “We think it’s a $1.5 billion business.”

American Living offers the right price for the merchandise, Ullman said. While “customers may not be able to afford to buy it all the time,” he said there is no fundamental problem with the pricing.

During a tour of the Garden State Plaza store, Ullman showed off the 4,500-square-foot American Living shop. Eleven Penney’s units feature these American Living “hubs.” They’re readily identified by a classic white wood fixturing. At other Penney’s, the merchandise is widely spread through various departments, but new stores, in most cases, will create hubs.

Ken Hicks, Penney’s president and chief merchandising officer, told analysts American Living will expand into young men’s, outerwear, infants, tabletop and housewares. “We never had one brand cross so many categories.” The brand launched in 600 stores and currently has about 40 categories.

The chain’s 2007-2011 plan will “probably be elongated based on the current environment,” Ullman said. It’s intended to establish Penney’s as “the preferred place to shop for Middle America, having a strong and enduring emotional connection with customers, inspiring merchandise and service, and becoming the preferred choice for a retail career,” he said.

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