By and  on April 19, 2007

J.C. Penney is coming to Manhattan.

The Plano, Tex.-based retailer on Wednesday confirmed it plans to open a three-level, 150,000-square-foot store at the Manhattan Mall in the Herald Square district in late 2008 or early 2009. It will be Penney's first store in Manhattan and will be located a block away from the flagship of rival Macy's. The announcement confirms a front-page story in WWD Friday.

"We'll open as fast as we can get it done and do it right," said Myron E. Ullman 3rd, chairman and chief executive officer of Penney's. "The Manhattan store will give us a unique stage to showcase our brands in the most important market in the U.S. We're very enthusiastic about this new store."

Ullman's remarks were made on the second day of the company's annual meeting with analysts in Fort Worth.

Penney's has been circling Manhattan for some time. Last year, the retailer was said to be looking for about 30,000 square feet of retail space in Manhattan, targeting the 34th Street corridor. By opening a store in the area, Penney's not only is diving into a booming retail neighborhood, but also taking its national market share battle with Macy's right to that retailer's doorstep.

Ullman said the company was urged by customers who visited a pop-up store in Times Square in March 2006 to open a Manhattan store. In addition, the chain's stores in Queens and the Bronx are among its most profitable and have had the biggest gains.

Manhattan Mall, a 1 million-square-foot, mixed-use building located on Sixth Avenue between 32nd and 33rd Streets, has 164,000 square feet of retail space on four levels. Ullman said Penney's will occupy space on the ground level and two lower floors. The company provided few details, but a source close to Manhattan Mall said Penney's will only have a small ground-floor presence or lobby leading to the lower levels — the food court and the subway level — each of which has 70,000 to 75,000 square feet of space. A portion of the mall may be reconfigured to accommodate the retailer.

If tenants need to be moved, "there's a fair amount of flexibility on the first floor," said the source. "Their leases are coming due."Penney's may have an opportunity to expand the unit in the future. Vornado Realty Trust, which bought Manhattan Mall from Argent for $689 million in November, also owns the Pennsylvania Hotel, which is adjacent to the mall. Vornado has already said it intends to tear down the hotel and build an office tower with a trading floor.

"Penney's could expand horizontally and open up on the Seventh Avenue side of the Pennsylvania Hotel," said a real estate source. "In the past, the lower levels were just as successful as [the] ground floor. It's very powerful because you have direct access to subways. It's more attractive than you may think it is."

Mike Boylson, executive vice president and chief marketing officer, said the new store will target customers in the 35- to 54-year-old age range, with an annual income of $40,000 to $100,000. Ken Hicks, president and chief merchandising officer, said Penney's targets four main consumer lifestyles: conservative, traditional, modern and trendy.

Penney's could compete on "moderate classifications that Macy's carries at the bottom of its price architecture," said Arnold Aronson, managing director of retail strategies at Kurt Salmon Associates. "They compete against each other in malls. In juniors, Macy's takes a trendier approach. In each family of business, Macy's has a much more fashion-oriented customer."

Penney's has made no secret of its ambition to upgrade its assortments, though. American Living from the Global Brand Concepts division of Polo Ralph Lauren Corp., launching next spring, is just one example, and Hicks said it will be an important anchor in the Manhattan Mall store. Penney's executives said they haven't decided whether they will put a Sephora in the store. There is already a freestanding Sephora on 34th Street between Sixth and Seventh Avenues.

Macy's itself has been adding higher-priced lines, which "has provided Penney's with an audience that doesn't want to go up to the price points Macy's represents," Aronson said. "Macy's upgraded so it could move away from the competition. The Gap customer, and more basic and commodity-oriented customers," will be interested in Penney's.

Gap's largest volume store is on the corner of 34th Street and Sixth Avenue, and there also are large flagships for Victoria's Secret, H&M and Old Navy nearby. The future of the Old Navy site is up in the air, however, as the building is being sold by its owner. Penney's could even draw from stores as far south as the 20s, where retailers such as Filene's Basement, Bed Bath & Beyond and Old Navy are located.The new Penney's unit will be opening right in Macy's backyard, one block from the lucrative Herald Square flagship, which is said to generate about $650 million to $675 million in annual volume. With a fraction of Macy's 1 million square feet, Penney's is not seen as posing a major threat to that store. However, Penney's has been on a tear of innovation over the last 18 months, and Ullman has stated that he sees immense opportunity to capture market share from Federated Department Stores as it digests the former May Co. stores and transforms Macy's into a nationwide nameplate. Penney's is spending $1 billion a year to improve its stores.

The Brooklyn-Manhattan Transit subway lines N, R, Q and W, and the Independent lines B, D, F and V pass beneath Herald Square. According to the 34th Street Partnership, a coalition of property owners and city officials working to revitalize the area, 100 million people pass through the four corners of 34th Street and Broadway annually. One million public transit users a day walk through the district.

"This is about the vitality of the district," said Dan Pisark, vice president of retail services at the 34th Street Partnership. "They're going to do great business there. There's definitely a 34th Street shopper who's going to go to Penney's."

Aronson noted that, by virtue of its location near transportation hubs, Penney's will be trying to target the assortments to satisfy an urban and suburban customer. "Penney's has a huge opportunity, but it's going to have to balance and align its merchandise mix to the variety of demographic and psychographic profiles," he said.

Service is another area where Penney's could distinguish itself. Ullman underscored the retailer's commitment to service during the annual meeting, saying: "Our strategy includes inspiring our customers with our merchandise and services." Macy's, which also has been trying to improve its customer service, has had difficulty in that area in the past.

Manhattan is a big step for Penney's, which wants to position itself as the preferred shopping choice for Middle America.

"The things driving the growth right now are brand positioning; merchandising, including a big lifestyle focus; private brands as well as new brands and concepts, and Internet, which has now hit $1.3 billion," Robert Cavanaugh, the company's executive vice president and chief financial officer, said at Wednesday's annual meeting.Last year, Penney's had a 44 percent dividend increase, saw its credit ratings upgraded and completed a $750 million stock repurchase plan.

Cavanaugh said department store sales will increase in the midsingle digits this year, and the mid- to high-single digits for 2008 through 2011. Comp-store sales are expected to rise in the low-single digits this year and the low- to midsingle digits for 2008 through 2011. The direct sales division, which includes Internet and catalogue sales, is expected to grow by low-single digits this year and midsingle digits for 2008 through 2011.

The retailer is planning to open 250 stores between 2007 and 2011, including 175 new locations and 75 relocations, said Michael Dastugue, senior vice president of property development, for an 18 percent increase in square footage. Of the new stores, 80 to 90 percent will be off-mall formats.

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