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J.C. Penney’s B-T-S Strategy Seen Key To Revival

Myron "Mike" Ullman 3rd has already set about reversing much of what was initiated by his predecessor.

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Myron “Mike” Ullman 3rd is taking pages from his old playbook in what will be a tough year ahead to revive J. C. Penney.

Ullman got at least some good news late last week when investor George Soros took a 7.9 percent stake in the retailer and Goldman Sachs reportedly lined up $1.75 billion in real estate and asset-backed financing to stabilize operations and sustain upgrades, potentially giving the Penney’s chief executive some breathing room.

The ceo has already set about reversing much of what was initiated by his predecessor, Ron Johnson, by:

• Slowing down the aggressive and costly shop rollout;

• Reviving private brands that were downsized;

• Cutting back on the tighter, contemporary fits in apparel in favor of a more classic, traditional balance for customers over 35;

• Bringing back big one-day sales and steeper markdowns and value deals while reducing everyday low pricing.

On hold are some major shop rollouts, with sources seeing delays on the Disney, Carters and Giggle shops for kids — deals that were unveiled months ago and might have to be renegotiated, potentially pushing the revamp of the kids’ floor to 2014, according to sources. The deals were contingent on creating shops which the now cash-strapped Penney’s might not want to proceed with. The retailer is expected to burn through more than $1 billion in the first quarter to catch up on vendor payments and pay for home shops that are being built, according to analysts’ estimates.

Last September, Penney’s said it would open Disney children’s boutiques in at least 520 stores in fall 2013, with products designed exclusively for the chain, unlike the mass-distributed licensed goods sold elsewhere. Costumes, plush toys, figurines, footwear, sleepwear, underwear, backpacks, lunch totes and apparel for boys, girls and babies were on the agenda. Carter’s and Giggle shops were revealed earlier. It’s not clear whether Penney’s could carry the goods without building the shops. Penney’s had no update on the situation. Previously, a few women’s shops were delayed to focus on the home floor, which is being reintroduced next month. Carter’s had no comment on Penney’s; Disney and Giggle officials couldn’t be reached.

 

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Ullman, along with his chief merchant Liz Sweney, is said to be on the hunt for department store talent seasoned in the art of promoting and planning merchandise, with their eyes on some Penney’s alumni. Already, Ken Mangione has returned as executive vice president of product development, design and sourcing, to lead the charge to bolster private brands.

Henry Juvers, a former senior vice president and director of marketing, planning and promotions, was among those who left when Johnson put in a new regime. He is said to have been in and out of Penney’s Plano, Tex., headquarters since Ullman’s return, raising speculation he may return to help get the promoting back in gear. Penney’s said Juvers has simply been visiting former colleagues on occasion. Michael Boylson, executive vice president of marketing, left around the time Johnson joined, but there is no word on whether Boylson would come out of retirement.

“They don’t have anybody there now who understands running a department store,” one vendor contended, with a few exceptions being Sweney and Ullman. “They must bring back merchants who knew how, and how often, to stage one-day sales and storewide events, and how each category factors in.”

While moving fast with changes to stabilize the business, Ullman must still live with a lot of what Johnson put in place or had in the pipeline, making the situation complicated. Ullman is expected to maintain much of the modernization work of the past year. While Johnson went overboard with his aggressive shop rollout to transform the selling floor, it’s often forgotten that Ullman, during his first stint as Penney’s ceo from December 2004 to November 2011, pioneered the retailer’s early in-store shops, launching Sephora, MNG by Mango, Call It Spring by Aldo, Modern Bride and American Living, which was designed by Ralph Lauren Corp. and was discontinued last year.

The key now is for Penney’s to get through the spring season, after which it faces a critical and ultimately decisive back-to-school season. Ullman was not available for comment.

Internally, Ullman refers to back-to-school as “our Olympics” and he’s just hired advertising agency Young & Rubicam to work on creating a b-t-s campaign. In terms of the creative, it’s dependent on Penney’s inventory levels and what categories and items are being built up for the upcoming season. Historically, Penney’s commanded a hefty share of the b-t-s market, but it lost ground last year under the stewardship of Johnson, who was ousted April 7 and replaced by Ullman. Johnson did have a hand in shaping the upcoming b-t-s season, and there’s time for Ullman to have some impact, but not fully. Generally it takes six to nine months to get the merchandise manufactured and the strategy in place.

“Promotions for back-to-school will be in full swing with private brands,” said one apparel source. “They won’t include national brands and certain brands in the new home area, like Bodum and Jonathan Adler. But back-to-school affects all consumers and categories. It’s a storewide phenomena. It’s a promoting season. Penney’s will be a big-time player again by back-to-school.”

“We are still focused on launching home. Back-to-school is our next big initiative. It’s still very early, and just coming together,” said Daphne Avila, a Penney’s spokeswoman. “We don’t have our promotional execution buttoned up, and it’s kind of premature to compare to what it was in the past.”

Avila did say that b-t-s 2013 will be “a hybrid of what worked well in the past, obviously with coupons. Over the past year, we have learned that customers love coupons.”

She also confirmed Penney’s is moving forward on certain Johnson initiatives, including certain shop environments and brands and cleaner overall store environments, making shopping easier. “We want to preserve things that instill a sense of newness and not revert back,” she said.

The pricing for b-t-s will be a mix of everyday low pricing and manufacturer’s suggested retail price, depending on the brands and their agreements with Penney’s. Private labels will be coming out at regular prices and subject to sales and coupons. “They will primarily affect private brands and any national brands that want to participate,” Avila said.

St. John’s Bay, a private brand emphasizing classic styling, several seasons ago scrapped its women’s merchandise. Now women’s is being reintroduced in time for Mother’s Day. Some of the goods are already available online.

The Worthington private label will have a stronger statement on the selling floor, and in-store shops to distinguish the line further are being considered. Worthington offers classic fits and styling, as well as some modern pieces and looks that transcend from work into evening for versatility. The two private brands were both at one time $1 billion revenue generators.

With Penney’s home business, it’s two steps forward and one step back. After procuring a lot of updated home goods from Bodum, Jonathan Adler and Michael Graves, Penney’s is now taking a firmer position on traditional styling — think florals — while sticking with the updated merchandise that insiders say to has a component with a European flair and an Ikea-esque character. Penney’s is battling Macy’s in court in a contractual dispute over the right to sell certain Martha Stewart home products, including some designed by her but unbranded. The retailer also has an opportunity to recover market share in window coverings. At one time, Penney’s had about a 40 percent domestic share.

“The challenge for all of this is, once you throw out something, can you pull it back out of the garbage?” said an ex-Penney’s official. “They are working to get those things back. Everybody has been focused on the pricing issue, but the real issue is the merchandise.”

He did advise that with price promoting, “Penney’s doesn’t have to go straight to where they were, nor should they. Now they have an opportunity to increase the level of promotions over time, which is a good thing. The second challenge is they don’t have the margins built in. They don’t have the markups to run all the steep promotions they were running since they took the prices down.”

Historically, Penney’s pricing was much different than during Johnson’s short tenure. A men’s shirt, for example, that cost Penney’s $6 to get made would typically be initially ticketed at $24 and promoted at 50 percent off to $12. But during Johnson’s run, the price started at $14 and had just a few takers when $2 off was offered, and more takers at $4 or $5 off, leaving a final price of $9.99 and leaving Penney’s with insufficient margin and, ultimately, losses.

“Penney’s needs to get the markup up to the right level over time,” said the ex-Penney’s official. “They can’t all of a sudden put that shirt out at $24 again. You have to flow it in. You’ve got to get the goods made and ticketed overseas. You also have to get rid of the old goods before you bring in the re-ticketed goods. For back to school, Penney’s can get some things made and marked up at a reasonable rate and get away with offering 30 or 40 percent off, but the markup won’t be a big as what it was.”

There’s less pricing flexibility with national brands such as Levi’s and Izod, compared with private brands. “These national brands do have rules and minimum advertised prices. A retailer can do whatever they want but they might lose vendor support and marketing money,” said the source.

A Seventh Avenue executive, who also requested anonymity, said Penney’s has contractual pricing constraints with certain brands. He cited Joe Fresh, Happy Chic by Jonathan Adler and Bodum. “Penney’s is not allowed to promote them. It has to be at the everyday price. Penney’s might be handcuffed based on agreements they signed with these guys who don’t want their brands to be footballed around.”

Penney’s has started re-ticketing merchandise and easing back into promotions. Last week, the Manhattan flagship had a spectrum of deals, generally 20 to 40 percent off, with some buy one, get one at 50 percent off, and some products offered at 50 percent off a manufacturer’s suggested price. There were also a lot of low-priced spring and summer goods, including shorts at $6.99 and flip flops for $1, demonstrating that Penney’s is determined to drive traffic and sacrifice some margin for it. Two weeks ago, there was a “friends and family” event offering 20 percent off; last Wednesday, an online-only promotion offered $20 off any purchase of $100 or more, and earlier this year, coupons were reinstated. Online, some in-house brands such as Liz Claiborne were tagged with the original price and a markdown of about one-third off, whereas Joe Fresh remains at everyday low prices.

The store’s homepage recently read “You asked for a sale. You deserve a sale and here it is! Stock up on shorts, Tees, sandals and all things spring.” The site showed items such as Lee capris, $40 original, $29.99 sale; Allen B swimdress, $64 original, $48 sale; a.n.a. cropped jeans, $40 original, $27.99 sale, and Worthington pleat-neck crossover top, $20 original, $14.99 sale.

One industry expert said it’s too late for Penney’s to stage major promotions for Mother’s Day or Father’s Day, but it’s likely some type of Mother’s Day event will appear around May 1. For those holidays, Penney’s is likely to be “surgical,” focusing on a few categories or items to aggressively promote, rather than taking the broader approach that Macy’s and Kohl’s will have, due to how Penney’s bought its merchandise. “Starting around May 1, my guess is Penney’s will start to promote Mother’s Day” with some jewelry, apparel and accessories, the Seventh Avenue source suggested. “Generally, Penney’s does not have the goods marked at the right price to promote it well, so margins could suffer.”

According to retail analyst Walter Loeb, significant promotional merchandise should be available in Penney’s for b-t-s selling with high/low pricing. “This leads me to expect an even more aggressive promotional position for the holiday selling season that actually begins before Thanksgiving. In my opinion, former customers will respond favorably to the promotions as J.C. Penney signals it has returned to a value-driven stance,” Loeb said in one of his many blogs on Penney’s.

Robert Savage, ceo of Nanette Lepore, said Ullman and Sweney visited his showroom two weeks ago. “Mostly he was reassuring us and said he was very happy with the performance of L’amour Nanette Lepore,” a junior line sold in 600 shops-in-shop and on jcpenney.com.

A spokeswoman for Michael Graves, which is installing in-store shops in the home department next month, said, “Michael is continuing his relationship with J.C. Penney. The home rollout is continuing as planned, and we maintain great communication with the executive, merchant and marketing teams of J.C. Penney.” The home launch is still slated for May 16 in New York.

Bud Konheim, ceo of Nicole Miller, which has 17 categories at Penney’s under the Nicole by Nicole Miller label, flew down to Plano, Tex., April 15 with Miller and her design assistant, Kim Barasch, to meet with the Penney’s executives. “It was great. It’s a whole new ball game.” He said there are still plenty of questions about which lines Penney’s will keep and which they’ll drop. He got the feeling they will continue with shops-in-shop on a selective basis. Nicole by Nicole Miller is among the brands where the construction on new shops was delayed.

 

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