J.C. Penney Co. Inc. is back to chasing volume and eager to take market share.
In a new five-year plan unveiled Tuesday at the annual investors’ meeting, Penney’s said it’s targeting $23 billion in annual sales by 2014 and by then will return to its historic highs of 9 to 10 percent operating margins and $250 in sales per square foot. That compares with last year’s $17.6 billion in volume, 3.94 percent margin rate and $206 in net sales a square foot.
“Retailing is a contact sport. You have to take it away from someone else,” said Myron E. “Mike” Ullman 3rd, chairman and chief executive officer.
“This plan is clearly built on organic growth. We like to say its five, five, five — a five-year plan, add $5 billion in sales and $5 for the EPS.”
Ullman and other officials stressed programs are in place to elevate productivity, particularly in lagging areas such as fine jewelry, center core, women’s “modern” shoes and intimate apparel, and with 25- to 44-year-olds, where there’s room to grow. Penney’s scores better with those 45 and older and younger than 25.
But the retailer is hoping to get a big lift later this year through product launches, including the MNG by Mango fast-fashion collection that will be launched exclusively in 77 doors this fall and expanded to 600 stores by fall 2011. Mango at Penney’s will be promotionally priced fast fashion but not disposable clothing, with sharper prices than Mango’s own stores, and new products flowing in more than once a month. Mango will be set up as “a store within a store,” similar to how Penney’s has established Sephora shops.
In addition, Penney’s is relaunching Liz Claiborne on an exclusive basis this fall, and continues to roll out in-store Sephora shops — adding 75 to reach 230 by the end of 2010.
Of the $5 billion-plus in sales growth envisioned, existing stores are seen contributing $3 billion, with 5 percent comp gains, while online sales should increase by $1 billion, to $2.5 billion, in 2014, officials said.
Only a handful of new stores will open in the next few years, though the pace could pick up to 20 or 30 in years four and five of the plan. Total square footage is seen growing to 119 million in five years from 111 million.
Penney’s is also conservative on the margin outlook because, as Ullman said, “We are assuming it’s going to be a very price competitive marketplace.” Gross margins are projected to be flat this year, with only slight increases over the five years as Penney’s stays focused on keeping prices down and serving middle America.
After 2010, EPS growth, adjusted for the pension expenses, is expected to achieve a 25 percent compounded annual growth rate over the following four years, bringing it to over $5 a share in 2014. Cash flow is expected to increase from $200 million in 2010 to $500 million in 2014. Diluted EPS were $1.08 last year.
“It’s a new day at J.C. Penney, not just in our advertising, but in our attitude and approach to growing the business,” Ullman said.
Through the recession, Penney’s cut inventory levels and the store opening program while staying “committed to maintaining our customer experience, brand launches and merchandise flow initiatives” and increasing the investment in “stepping up our style, Sephora, digital initiatives and leadership development,” Ullman said.
While reporting sharp sales declines in 2009, partly by design, partly due to the weak economy, “It’s fair to say that in each year of the recession our balance sheet actually grew in strength,” Ullman said. “We are well positioned for profitable growth, even in this economy.”
Lately, Ullman, who is also a director at the Federal Reserve Bank of Dallas, has noticed a “return to interest in shopping and single-digit traffic gains in malls.” On the other hand, “The middle-income customer has a lot weighing on their mind,” he added, citing declining home values, rising unemployment and difficulty getting credit.
On the merchandise front, women’s sales have been “above plan,” said Liz Sweney, executive vice president and senior general merchandise manager of women’s apparel, accessories, handbags, shoes and fine jewelry.
Other Penney’s merchants also at the meeting said the chain has performed “an extreme makeover” in women’s shoes to bring in modern looks, such as caged footwear, safari styles, suede boots and studs, to bring balance to an assortment that has been stronger in “comfort” and athletic footwear.
In intimate apparel, there was too much focus on driving margin rate, as opposed to margin dollars, but the chain is getting competitive in terms of national brands, price and exploiting Ambrielle, a private label.
Center core was described as “underdeveloped and underpenetrated, but the strategy there is to create fun, trend-right environments and impulse shopping. Work is afoot to open up the space, install new trend fixtures and increase cross selling and marketing with apparel to motivate shopping.”
Penney’s is also working to provide “price clarity,” a greater “clarity of offering” in certain categories such as jewelry and men’s sportswear, and add some attitude to its Web site, which has been strong on functionality and somewhat lacking in style.
Jewelry last year was particularly tough. “It’s not just the fact that fine jewelry was a difficult category in the downturn. Some of it was self-inflicted,” Ullman said.
Penney’s is also reorganizing its clearance areas so they’re easier to shop, and has been aligning the merchandise offering more closely from stores to the Internet.
On the men’s side, growing market share with key item dominance, narrowing of assortments, reinforcing the color message, and striving to draw more 25- to 45-year-old consumers was cited. Penney’s has added more youthful exclusive brands such as Irreverent and Article 365, and recently repositioned the J. Ferrar label with trimmer fits and casual components.
In 2006, Penney’s posted its record 9.7 percent operating margin and $248 in sales a square foot. Getting back to the historical highs will help the chain get back to investment grade status. On Tuesday, following the investor conference and details of the five-year plan, Penney’s stock closed at $30.48, down 3.12 percent, or 98 cents.