By and  on April 20, 2005

PLANO, Tex. — J.C. Penney Co. is looking to the future with a new five-year growth strategy that chairman and chief executive officer Myron E. Ullman 3rd on Tuesday described as a dramatic evolution of the chain’s drive to be the dominant midtier department store in the U.S.

Ullman, who took the reins in December upon the retirement of Allen Questrom, outlined his vision for the $18-billion chain during a two-day equity analysts’ meeting at Penney’s headquarters here that concludes today after speeches from most of the top departmental executives.

His goals include solidifying Penney’s standing with the current customer base and reaching out to new shoppers with more vibrant, emotional and compelling in-store trend statements that also connote value; increase inventory productivity, and build more off-the-mall freestanding stores. The company now has 10 freestanding stores and previously said it plans to open at least 75 such stores on the next few years.

Penney’s current freestanding stores continually beat plan and ring up sales of at least $250 a square foot. Penney’s mall-based stores typically average about $150 in sales a gross square foot, up $15, or 11 percent, since 2001, the first full-year of Questrom’s five-year turnaround mission.

“I’ve waited four months for this day,” Ullman said in opening remarks to several hundred Wall Street analysts. “I believe that we have the power to achieve dramatic growth at J.C. Penney in the next five years and attain top profitability by 2009.

“We’re in a position to grow more and capitalize on opportunities, and are committed to the path that we are going to outline to you,’’ he said. “We have dramatic plans to increase earnings per share in 2005. This plan is not a revolution but an evolution of our desire to be the preferred choice for middle America.”

Ken Hicks, president and chief merchandising officer, said the chain is committed to stronger sales and profits and to polishing its image among shoppers.

“We will continue to develop and implement more of our Box 1 [latest prototype] format style department stores and play up trend-drivers and key fashion statements across the store in areas that we call ‘hot spots’ and ‘hot zones,’’’ Hicks said. “We plan to improve consistency across the stores, update fixtures and store appearance on a continual basis, grow sales and profits, reduce expenses by $200 million and make a strong emotional connection to the J.C. Penney shopper. We really want her to feel smart about the prices she pays.“Our new, long-range plan includes a stronger merchandise focus on the needs of our shoppers and keeping J.C. Penney in a leadership position by building focused businesses that cater to their lifestyles, including women’s and men’s casual fashions, lingerie and soft home furnishings,” Hicks added. “We will reach them through powerful marketing initiatives.”

Penney’s recently has rolled out several exclusive new brands, including nicole by Nicole Miller, a moderate dress and sportswear line, and said Tuesday it will debut a myriad of other private brand products in the coming year, including a men’s tuxedo collection and more products for women’s, men’s, teens and home.

Ullman is seeking to leave his imprimatur on the 1,017-unit chain after Questrom conceived, implemented and shepherded the Penney’s five-year turnaround plan that ends this year. The company’s target shoppers are women 35 to 54 years old with household incomes of $35,000 to $85,000 a year who crave fashion but demand value.

Penney’s shares closed Tuesday at $45.52 in New York Stock Exchange trading, down 2.15 percent from Monday.

The company previously said that it’s planning low-single-digit comp-store sales gains in 2005. It had 2 percent annual store-to-store increases in 2004. Ullman said Penney’s will achieve 6 to 8 percent earnings before interest and taxes levels by yearend 2005 and that EBIT levels were 7.1 percent in 2004.

For its latest fiscal year, Penney’s posted earnings of $524 million, or $1.76 a share, compared with a loss of $928 million, or $3.13 a share, the previous year. Revenues grew 3.6 percent to $18.24 billion from $17.79 billion.

Ullman, who planned to give his closing remarks today as well as take analysts’ questions at a news conference, did not comment Tuesday on published reports about a potential leveraged buyout. As reported late last month, Cerberus Capital Management LP and the Carlyle Group, along with another private equity player, were said to be contemplating a move on Penney’s in a $16 billion to $18 billion leveraged buyout.

With a market capitalization of about $13 billion and $4.7 billion worth of cash and short-term securities on its balance sheet, up from $3 billion a year ago, Penney’s is considered an attractive LBO target. The goal of the Cerberus-Carlyle investment could be to milk Penney’s for cash while improving the businesses’ operations, especially considering the company has more steam left in its turnaround program.However,  Penney’s  has strong defenses in place that would make an LBO by financial investors difficult, mostly because getting the board’s consent would be extremely tough and time-consuming. A hostile takeover of Penney’s could take place, but it would carry a high acquisition price.

According to Penney’s bylaws, the retailer has a tight defense against hostile takeovers, including a shareholder-rights plan — otherwise known as a “poison pill” — that was initiated in 1986 and replaced in 2002. Public companies implement poison pills as a way to dissuade hostile takeovers. They use them to make the company’s stock less attractive to the potential buyer.

Speculation about a possible LBO came several days after New York-based Cerberus hired Vanessa Castagna, former chairman and ceo of J.C. Penney stores, catalogue and Internet, as a senior member of its operations team and executive chairwoman of Mervyn’s department store chain, which Cerberus partially owns.

In the last two years, Penney’s shed its ailing Eckerd drugstore chain, implemented aggressive cost reductions and overhauled its private brand offerings for greater quality and value.

As of Jan. 29, in addition to 1,017 stores in the U.S. and Puerto Rico, Penney’s operated 62 Renner department stores in Brazil. Although it owns more than 70 stores in California, its strength is east of the Mississippi, especially in New York, Pennsylvania, Ohio, Florida and Michigan. The retailer has stores in all 50 states except Hawaii.

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