Penney’s Adjusting American Living

2Q earnings down, but stock rises.

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J.C. Penney Co. Inc., while proclaiming its new American Living Collections a success, nevertheless is tweaking some of the brand’s pricing and product.

“We couldn’t modify everything for fall,” said Myron E. “Mike” Ullman 3rd, chairman and chief executive officer, of the collection developed by the Global Brand Concepts division of Polo Ralph Lauren. “In spring, you’ll see even more modification because that’s the season we could impact the most.”

This story first appeared in the August 18, 2008 issue of WWD.  Subscribe Today.

Penney’s revealed the changes ahead as it on Friday posted a 35.7 percent drop in second-quarter earnings, although the company beat expectations. Penney’s also said comparable-store inventories were below year-ago levels, indicating a better balance than it had earlier in the year. Investors rewarded the company by trading up its shares 8.4 percent to $39.94 on a day when the S&P Retail Index was up just 1.8 percent to 400.32.

American Living, which sits at the top of Penney’s price range, was initially mispriced in some categories and will be adjusted where necessary, said Ullman. Some areas were also overassorted and will be refocused.

“We still think it’s a billion-dollar brand as it develops,” said Ullman, noting Penney’s would be buying more product across-the-board from the Global Brand Concepts division for this coming spring than last spring. “We’re very satisfied that, for the first season, it was a good opportunity.”

He chalked up the course corrections to the alterations that can be expected of a new brand with a large rollout.

“It would have been a miracle if what we had done was perfect,” said the ceo. “When you launch 40 categories, not everything is going to be a hit. The concept was very well received.”

Dresses, accessories, boys and girl’s apparel and window coverings were among the brand’s categories that were “extremely well received.”

American Living had the misfortune of launching into what has become one of the worst times for the U.S. consumer in a generation. Penney’s found itself with too much inventory and spent much of the spring season cleaning house. Ullman maintained, though, that while customers were looking for price, they were also reacting to the newness offered by the brand, which doesn’t carry the Ralph Lauren name but bears the hallmark preppy accents of the designer’s aesthetic.

Penney’s profits for the three months ended Aug. 2 fell to $117 million, or 52 cents a diluted share, compared with $182 million, or 81 cents, a year ago. Despite the steep drop, earnings beat analysts’ expectations of 50 cents, according to Yahoo Finance. Sales for the three months slid 2.5 percent to $4.28 billion from $4.39 billion. Comparable-store sales fell 4.3 percent.

For the six months, earnings fell 43.6 percent to $237 million, or 1.06 a diluted share, on a 3.8 percent decline in sales to $8.41 billion.

Jason Asaeda, a retail equity analyst at Standard & Poor’s said the American Living brand fills an important niche for the chain.

“If you look at department stores these days, you always see some real [Ralph] Lauren influences in the merchandise and that was lacking at Penney’s,” said Asaeda. “It definitely has the same look and the same feel and I think the quality is very good. It was a little bit expensive for the Penney’s shopper at a time when they were cutting back.”

Asaeda said second-quarter results were a “turning point” for the firm, which promised to rein in inventories.

“I was very happy to see that they have their inventory under control,” said the analyst. “My expectation going forward is their merchandise margins should improve.”

For the third quarter, Penney’s said earnings per share would come in at 70 to 75 cents, down from $1.17 a year ago. Total sales are slated to drop by a percentage in the low-single digits as comparable-store sales slide by midsingle digits.

The retailer also has some new initiatives for the back-to-school season, which contributes significantly to the third quarter.

“In this environment, when consumers are more discriminating with their purchases, we’ve recognized the importance of ensuring that our merchandise is compelling with the combination of style, quality and smart prices that provides differentiation from our competitors,” said Ken Hicks, president and chief merchandising officer, on a conference call with investors.

For b-t-s, the firm introduced a number of brands in its juniors and young men’s departments, including Le Tigre from Kenneth Cole Productions, Fabulosity designed by Kimora Lee Simmons and Decree, a denim line for girls and young women.

“Early results on Decree are positive in apparel, shoes and accessories,” said Hicks.

Penney’s price cuts aren’t restricted to the American Living brand. “In this environment, any vendor we’re working with we’re talking about how to get price points sharper,” said Ullman.

Still, he also said the tough economy was a chance for the 1,083-door chain to pick up market share. “We don’t want to do anything to not give us the opportunity to grow share in this environment,” he said. “When you close stores you’re losing share, when you open stores you’re gaining share.”

In the second quarter, Penney’s opened 12 new and relocated stores, 11 of which were in the firm’s off-mall format.

Ullman noted the U.S. added 125 million square feet of department store space over the last five years and that not all of it was needed. “There’s going to be a consolidation and the weaker players are not going to be there,” he said.

Already, this year larger format stores including Mervyns, Boscov’s, Goody’s Family Clothing and Steve & Barry’s have declared bankruptcy. These or other Chapter 11 filings might well open up opportunities for Penney’s.

“We’ll certainly stay flexible,” said Ullman. “We wouldn’t buy real estate just at any price. There’s room for us to grow in California and in the Northeast.” That might make locations that are currently under the Mervyns and Boscov’s umbrellas a good geographic match for the firm.

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