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Penney’s New Plan Hastens Growth

The repositioning of J.C. Penney has been so successful that the company has aggressively accelerated its growth plans.

FORT WORTH, Texas — The repositioning of J.C. Penney has been so successful that the company has aggressively accelerated its growth plans.

By achieving the objectives of its preliminary five-year plan in two years, the Plano, Texas-based department store has formulated a new strategy that calls for adding 250 new stores between now and 2011. This will encompass 175 new stores and 75 relocations, and is 100 more stores than the company said it would add by 2009.

In addition to the new units, some 300 stores will also be renovated by 2011. All told, this will total an 18 percent increase in square footage.

Penney’s is also projecting overall sales gains of 9 percent, which translates into mid- to high-single-digit annual sales gains overall and comps in the low to mid-single digits for the 2008 to 2011 time frame.

Other targets include posting operating income of between 12 percent and 12.5 percent of sales-up from 9.7 percent in 2006-and earnings per share of 16 percent on a compounded annual growth rate. Gross margins are expected to reach 40 percent in 2011, while operating expense ratios are seen hitting 28 percent of sales in 2011.

The company laid out its new five-year plan at a two-day analysts meeting here last week.

“We achieved our five-year plan in two years, so we put together a new five-year plan,” Myron (Mike) Ullman, chairman and CEO, told analysts. “These are strong, aggressive goals that will take us to an industry leadership position by 2011.”

In 2006, the retailer managed to exceed its 2007 sales plan of $19.9 billion with a 6 percent rise in sales. It also exceeded its 2008 income plan by hitting $1.9 billion, and its 2009 profitability target of 9.7 percent.

As a result of this, coupled with the recent changes in the department store climate in the U.S., Penney’s believes it’s a “unique time and place to accelerate our growth by being a relevant department store,” Ullman said.

He pointed to the company’s ongoing move to create “an emotional connection” with its customer and its planned enhancement of its eight private-label “power brands”-Ambrielle, a.n.a., Chris Madden, Cooks, St. John’s Bay, Stafford, Arizona and Worthington-as well as the introduction of American Living and the rollout of the Sephora brand as key to these initiatives.

As reported, Penney’s and the newly formed Global Brand Concepts division of Polo Ralph Lauren are partnering to develop and market a new brand, American Living, which Penney’s said will be the largest launch in its history. That label is slated to debut next year.

Other drivers of Penney’s aggressive growth plan include the further development of Jcp.com-currently a $1.3 billion business that is expected to have sales gains in the mid-single digits over the next five years-as well as a new merchandise-flow strategy that will improve sales and gross margins, and lower markdowns. Under this new strategy, the company said, Penney’s has reduced its cycle time to 40 weeks from 50 to 52 weeks with a goal to hit 25 weeks.

Men’s wear plays an important role in the company’s new five-year plan. Ken Hicks, president and chief merchant, told DNR that the men’s business “continues to be strong for us,” driven in large part by sportswear, both under the St. John’s Bay and Solitude labels. He also pointed to the recent addition of Concepts by Claiborne, as well as Izod, as standouts.

Hicks also singled out men’s big & tall as a differentiator, along with team sports merchandise. Because of Penney’s superior systems capabilities, he said, the retailer is able to stock each individual store with the most popular team sports merchandise. “That’s a strong advantage for us,” he said, noting that displaced fans in other cities can simply place their orders online for their favorite teams.

Hicks said the men’s accessories business and gifts are also doing well. “Basics continue to be very good,” he said. “And we feel we have the opportunity to grow and develop as a gifts headquarters.”

One of the biggest announcements made at the meeting was Penney’s planned opening of its first Manhattan store. The three-level unit, which will be located in Manhattan Mall on Sixth Avenue between 32nd and 33rd streets, one block from Macy’s, will be a “headquarters store,” Ullman said, which will also serve as an “anchor” to bring American Living, Sephora and Penney’s other exclusive brands to the New York City customer.

Ullman said Penney’s other two New York City stores, in Queens and the Bronx, are two of the company’s most successful and highest-volume units. “We can’t think of a better location for our customer,” he said of the Manhattan site.

The 150,000-square-foot store, which will be on the main floor of the mall and go two stories below ground, will be accessible from the New York City subways as well as the Long Island Rail Road and the New Jersey PATH trains. “It’s the crossroads of consumers in Manhattan,” he said.

The store “will be very visible,” he continued, and will have a “dominant” presence on Sixth Avenue. He acknowledged that the location is mired in “difficult structural issues,” but the mall’s new owner, Vornado Realty Trust, which bought the location for $689 million in November, is committed to making significant structural changes.

Ullman said these changes will take a while to complete and that Vornado should “hand the store over to us in late 2008 or early 2009.”

Although Manhattan might be the highest-profile unit the company has planned, the other 249 stores are also key cogs in the wheel. Some 80 to 90 percent will be off-the-mall concepts, the company said, since Penney’s 1,000 stores are already located in nearly every significant mall in America.

Hicks revealed that the off-the-mall units are currently posting higher sales per square foot than the company’s traditional mall stores, or $250 versus $170. “And we think they can be more productive.”

Penney’s also raised its guidance for the first quarter of 2007 from continuing operations to $1.02 a share from 99 cents, with no changes in its guidance for the remaining three quarters.

Ullman closed the meeting by saying: “We truly believe retailing is a contact sport and you have to take something away from somebody else to win.”

The analysts in attendance seemed pleased with what they heard. Deborah Weinswig of Citigroup put out three reports over the two-day conference and summed up her thoughts this way: “J.C. Penney’s new EBIT margin goal of 12 percent to 12.5 percent for its 2008-2011 long-range plan was in line with our expectations, and we believe the company could reach the low end of this goal by 2009, driven by its new brand positioning, continued execution in merchandising, Internet growth, square-footage growth (50 new stores per year) and strategic inventory flow.”