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Penney’s Scales Back Expansion Plans

Reacting to the weak retail environment, J.C. Penney Co. Inc. again reduced capital expenditures...

Once was not enough.

This story first appeared in the June 26, 2008 issue of WWD.  Subscribe Today.

Reacting to the weak retail environment, J.C. Penney Co. Inc. Wednesday again reduced capital expenditures, this time cutting 2009 capex to $650 million from $1 billion and reducing store opening and renovation plans.

But Myron E. “Mike” Ullman 3rd, chairman and chief executive officer, told WWD plans for the rollout of Sephora in-store shops remain intact despite fewer new stores and said Penney’s is still upbeat for its back-to-school season.

Investors snapped up shares of the retailer, sending them up 2.2 percent to close at $37.68 on the New York Stock Exchange.

As part of a midyear update, the retailer said it now plans to open or relocate 20 stores in 2009, down from the 36 in 2008, compared with the previous plans to open 50 stores each year through 2011. Plans for its first Manhattan store remain on track, and the company said that unit is “expected to be its highest sales volume location.”

Ullman said the capital expenditure cut to $650 million in 2009 would help the company maintain its “positive free cash flow” next year. The retailer’s midyear update is part of its goal in maintaining a level of transparency with Wall Street, he noted.

J.C. Penney is also scaling back its store renovation plans to between 10 and 15 units in 2009, down from 20 in 2008, compared with previous plans to renovate 65 each year through 2011.

In April, Penney’s slashed $200 million from its capex for the year, reducing new and relocated stores to 36 from 50 and renovations to 20 from 65.

Plans for Sephora’s rollout haven’t been affected, however. “The same number, 50 to 70, [is on track for] next year, except that more of our older stores will get a Sephora store now that we will have [fewer] new stores opening,” the ceo stated. “We have 72 Sephora shops now and 20 more will open for the balance of this year. There’ll be another 50 to 70 next year, with 20 [located] in the new stores.”

Ullman said Penney’s hardest-hit markets coincide with the toughest markets in housing: Florida, Southern California, Las Vegas and Phoenix. J.C. Penney is adjusting by focusing its store opening program on where its customers are located, or at least where Ullman says the emerging community exists. “Most of our new stores are in the South, such as Louisiana, Tennessee, Alabama and five new stores in Texas. We’ll open several more next year in Texas,” he said.

Ullman doesn’t expect additional modifications in the capex plan this year, noting it’s still too early to make a call regarding 2010. As for the pullback on store openings, that initiative was taken in conjunction with requests from some developers that are looking to postpone a few projects of their own until 2010 and 2011 due to housing concerns, Ullman said.

Despite the lackluster retail environment and pressures on the consumers’ household budgets, Ullman remains hopeful for back-to-school sales.

With seven years of strong back-to-school selling seasons, the retailer knows it is up against tough comparisons, and getting even decent results this year won’t be easy, Ullman acknowledged.

“We feel good about our offers, good about our marketing and our pricing proposition….We’re well prepared. It’s the time of the year when mom has to shop. Most kids need new clothes for back to school,” Ullman said.

Although the juniors category has been doing well, and the company will be launching Decree and Kimora Lee Simmons’ Fabulosity juniors lines, Ullman said there are also high expectations for young men’s.

“Our young men’s in American Living has the biggest upside,” he said. That category is hitting the sales floor in time for back-to-school, and the ceo said consumers will find the items “very sharply priced compared to the alternatives at the mall.”

Overall, the company is satisfied with early results from the American Living lifestyle collection produced by Polo Ralph Lauren Corp.’s Global Brand Concepts, which it believes could reach sales of $1 billion in three to four years.

“We are satisfied,” Ullman said, adding the company expected it would be tougher to achieve the results it’s seen so far.

While a few Wall Street analysts have criticized the higher price points for American Living, Ullman emphatically said the collection is “not inappropriately priced for what it is,” adding that in a booming economy it likely would have been easier to get even better results.

Sales in apparel categories have been good, which “bodes well” for fall, Ullman noted, boasting too that the retailer had its best women’s apparel business last fall. Women’s apparel sales are doing very well this month, Ullman said. Casual sportswear was the top category in women’s apparel, followed by the junior business and plus sizes. Career has also had a “positive” trend.

“We feel good about our women’s business,” Ullman said.

Sales in the home business and fine jewelry categories have been difficult, but also usually entail higher-ticket purchases.

The retailer expects total inventories to fall below 2007 levels by the back-to-school season, and plans to align inventory levels with sales expectations.

Penney’s has endured declines in comparable-store sales in each of the first four months of the current fiscal year. May’s were off 4.4 percent following declines of 1.7 percent, 12.3 percent and 6.7 percent in April, March and February, respectively.

When Penney’s released first-quarter results in May, it said it expected comps to decline in the midsingle digits during the current second quarter. First-quarter earnings dropped 49.6 percent to $120 million as sales declined 5.1 percent to $4.13 billion, and dropped 7.4 percent on a same-store basis.

Reacting to the revised plans, Citigroup retail analyst Deborah Weinswig wrote, “This news was consistent with our expectations [and] demonstrates disciplined and prudent planning on the part of JCP’s management team.” She reiterated her “buy” rating on the retailer.

The news from Penney’s helped the Standard & Poor’s Retail Index rise 1.4 percent to 374.46, while the Dow Jones Industrial Average remained steady, gaining 0.04 percent to 11,811.83. The S&P 500 rose 0.6 percent to 1,321.97.

In the department store sector, Macy’s Inc. rose 3.2 percent to $20.02, Sears Holdings Corp. advanced 1.1 percent to $74.44 and Kohl’s Corp. gained 2.3 percent to $42.05. Discounter Wal-Mart Stores Inc. jumped 1.4 percent to $58.12.

Among specialty retailers, The Talbots Inc. finished up 8 percent at $12.89 and landed on the New York Stock Exchange’s list of top 30 advances. AnnTaylor Stores Corp. climbed 3.1 percent to $25.57, J. Crew Group Inc. jumped 4.1 percent to $34.59 and Gap Inc. rose 0.8 percent to $16.89.