In the late Eighties, long before retailers began assessing the real value of their real estate, J.C. Penney cashed in — and it was the beginning of the end for the department store.
“In the Sixties, Seventies and Eighties, when Penney’s management and buyers were still on Sixth Avenue and kept close to the market in New York, there was strong color coordination, particularly in the home area. They had special fashion coordinators that made sure the colors matched and blended, and it was really very exciting to shop their home store,” recalled Walter Loeb, the veteran retail analyst and consultant. “Penney’s was also good at accessories, handbags and jewelry, and they were even strong on younger leisure fashion, and private label.”
“Penney’s appealed to real middle America, with work clothes that the working class could appreciate. It had no airs,” said Allen Questrom, the former chief executive officer of Neiman Marcus, Federated Department Stores, Macy’s Inc. and Barneys New York who ran Penney’s from September 2000 to December 2004. “It offered good value and Penney’s had strong, loyal store managers who spent time with their customers. Each store could buy a lot of goods on their own.”
In 1987, Penney’s revealed it was selling its headquarters on Sixth Avenue and 52nd Street in Manhattan for more than $400 million and relocating to Plano, Tex., to a sprawling building covering 429 acres that became a symbol of an overly bureaucratic, lumbering company, and that visitors compared to the Pentagon. By making the move, Penney’s capitalized on the sale of prime real estate, escaped New York taxes and moved to a lower-cost location that was centrally located for the national chain, making it easier to visit more stores for executives.
But by moving West, Penney’s left a lot of its veteran team behind who did not want to move to Texas, and found it harder to recruit top-tier talent in Dallas compared to New York. And over the ensuing years, the retailer never recaptured the same feel for fashion and style it once had.
“It was ego that drove the move,” said Loeb. “Penney’s management was really copying the big Sears and Kmart campuses, particularly Sears in Hoffman Estates,” in Illinois.
“There was a talent drain when they moved, though there are great retailers operating out of Bentonville and Minneapolis, so I’m not sure New York is the be all, end all,” said veteran apparel industry executive and entrepreneur Haim Dabah. “One thing that did happen was that Penney’s became a lot more bureaucratic, stifling creativity. They were purchasing stuff nine, 12 months in advance and didn’t move fast. It was not conducive to a nimble, agile team.”
What followed was three decades of rapid top-level management change, strategy shifts and reversals, meddling by shareholder activists and private equity owners, and a failure to heed rising competition from Kohl’s Corp., Target Corp., Walmart Inc., fast-fashion chains, dollar stores and Amazon.
As the business faltered, Penney’s began cutting costs, closing stores, creating more cost-efficient sourcing networks aiming at better margins, and in 2017, to further reduce its debt load, sold off the Plano headquarters building, and some land around it, for $353 million. The company leased back 65 percent of the space to stay at its home office.
There was also the infamous Ron Johnson strategy that nearly destroyed the company. The former Apple Inc. executive joined Penney’s in 2011 with great fanfare and a pledge to reverse the retailer’s fortunes with an ambitious scheme to modernize the stores and the merchandise, discontinue coupons and price-promoting, and shift to everyday low pricing. The result: once loyal customers stopped shopping the store, volume dropped by a third down to $12 billion, debt went sky-high, and Johnson was replaced. In an unusual twist of fate, his predecessor Myron “Mike” Ullman returned to run the store, even though just two years before, he had been dismissed by Bill Ackman, an activist shareholder and ceo of Pershing Square Capital Management, who was responsible for bringing in Johnson. Perhaps Ullman’s best strategy for Penney’s during his first stint as ceo was to install Sephora shops in the department stores in 2006.
After succeeding Johnson, Ullman stopped the financial bleeding though not much happened on the top line and was in turn succeeded by Marvin Ellison, who cleaned up some debt, enhanced the revolving credit facility and strengthened the financial position, and motivated the workforce. But he did more damage than good on the merchandising side, such as showroom-ing big-ticket appliances in an attempt to capture market share from Sears, Lowe’s and Home Depot (from where he joined Penney’s). Ellison abrupt left Penney’s after just three years to run Lowe’s, and was succeeded by current ceo Jill Soltau, formerly president and ceo of Jo-Ann Stores, the fabric and crafts retailers, and earlier, president of Shopko.
Now, the once proud, powerful and unpretentious J.C. Penney finds itself on the brink of bankruptcy and possible extinction, which nobody blames on Soltau. She’s been dealt a tough hand, regardless of the impact of COVID-19, and has been recasting the women’s selling floors with an easier-to-shop, lifestyle format with enhanced visuals and more thoughtful and obvious mannequin setups. What was a confusing sea of racks and aura of “stuff” has been disappearing. Activewear, special sizes and denim have been among the categories that have been played up, including the A.n.a. private label, which has evolved into more of a denim and casual bottom business. She also eliminated a lot of the merchandise programs, including appliances, that Ellison had introduced.
However, it seems to be running out of fuel.
In 2019, the company lost $268 million compared to a net loss of $255 million in 2018. The adjusted net loss improved to $257 million, compared to an adjusted net loss of $296 million in 2018.
Last year, total net sales decreased 8.1 percent to $10.72 billion, compared to $11.66 billion for fiscal 2018. Comparable-store sales decreased 7.7 percent. Excluding the impact of the company’s exit from major appliance and in-store furniture categories, same-store sales decreased 5.6 percent for the year.
“Soltau is trying to reconceptualize the company. I think her plan is pretty solid, but it takes time. The coronavirus stopped her in her tracks,” said Loeb. “There was supposed to be a meeting with analysts on April 7 to outline her whole plan. It got canceled.
“You also have to remember that Ron Tysoe, the non-executive chairman, is a big factor on finances. He’s terrific but in this environment everything is more difficult. Even if Penney’s reopens stores, people may not shop.”
There’s been speculation that developers like Simon Property Group and Brookfield Property Partners could partner to buy Penney’s to avoid more mall vacancies and the need to fill a major chunk of retail space. Many mall covenants with smaller tenants promise two anchor stores in their leases, and if an anchor leaves, the smaller retail tenants can leave, too, without penalty. Earlier this year, Authentic Brands Group with Simon and Brookfield jointly announced the acquisition of Forever 21.
Still, according to Loeb, “It is my feeling that J.C. Penney will go bankrupt. They missed two debt payments.”
“Penney’s hasn’t had a positive yearly sales increase for at least 10 years,” said Questrom. “The challenge for Penney’s is to define who their customer is. They have to create an identity in 2020. It’s a major different situation than Neiman’s,” which went bankrupt last week. “The issue with Neiman’s was the debt.”
When Questrom joined Penney’s, it was coming off three years of negative sales. “They never shopped Kohl’s and Kohl’s was eating their lunch,” Questrom recalled. “We spent a lot of time trying to understand Kohl’s customers and what Kohl’s was doing better than us. We looked at Bed, Bath & Beyond, and studied different retailers in different categories. We had a brand and a catalogue that was well-known, and an Internet business that was nonfunctional, so we put it together with the catalogue. We updated the merchandise, but not to the point of being contemporary.” He also saw the need for greater centralized merchandising, since the old localized method of buying was not cost-efficient.
“Penney’s did have a good home business before, at affordable prices. It could be good again. Kids could be good, too. They could have a bigger assortment catering to Hispanics,” Questrom suggested. “It’s a matter of studying your customer. You need merchandise people that have a smell for the goods and the customer.…If Penney’s can figure out how to get sales to tick, it can make money. They could make it with a lot fewer stores. But Penney’s needs to have a viable position in the market. I don’t think they have that yet.”
“Perception is the hardest thing in retail to change,” said a major supplier to Penney’s. “The store is tired and outdated. If you look at the retail marketplace, the midtier is the most challenged. Macy’s and Sears fall into that same bucket as Penney’s. Kohl’s doesn’t quite fit in there because it’s a much smaller-format in a lot of strip centers. For the big giant department stores it’s been a slow decline over the years and not a particularly fun shopping experience for the most part. Zara, H&M and Primark offer more value and execute better. In Kings Plaza, Brooklyn, [N.Y.] Primark took over a Sears store and it’s been great.
“But I believe both Macy’s and J.C. Penney have a chance to survive. They will have to be much smaller in terms of brick-and-mortar. A downsizing would have happened anyway within two years. The pandemic just pushed the timetable forward.”
“They had legendary merchants in New York, who really dictated to the wholesale community and wielded a lot of power,” said Dabah. “For many decades, Penney’s was merchant-centric. The senior leadership came from merchandising. That was their core competency and DNA, and they usually had the right product. But sometimes there was too much private label, and then you would see swings in the percentage of it,” between the balance of private label and brands. Those swings back and forth, Dabah said, “were always very hurtful.”
Competing against Macy’s and other department stores, Penney’s always found it difficult to land big brands, so it shifted into high gear developing private labels, the most famous of which was its Halston III collection, which was widely celebrated as the being the first to offer a designer label at the mass level, yet suffered from poor presentations and styles and disappointed shoppers.
Other private brands at Penney’s have fared better, and some even have generated $1 billion volumes in good years, most notably the Arizona denim-based young-at-heart private brand. Penney’s exclusive Liz Claiborne collection has also stood the test of time.
“In the mid-Nineties, companies needed to move from merchandise-centric to consumer-centric and Penney’s never made that move. The power switched to the customer,” Dabah observed. “There was more competition, meaning more choice for the customer, and those stores that focused on customers did well. Penney’s, however, continued to buy product too deep, piled it up too high, and marked it down too deep at the end of the season. They were not successful in making their merchandise look precious enough in the eyes of the consumer.”
“They were great general merchants, great catalogue merchants,” said Paul Charron, the former chairman and ceo of Liz Claiborne and VF Corp. executive. “They offered variations on urban, New York City themes for middle America at mid-prices and were very good at developing private label.”
For a long time, “They were successful at being everything to everybody, and when you try to be everything to everybody eventually you end up being nothing to anybody,” Charron added. “They had all these drugstores, auto and tire repair stores, photography studios, beauty salons. You can’t be all things to all people, or else your positioning in the marketplace gets very fuzzy.”
In the Eighties, as Kohl’s rapidly expanded nationally, department stores were still strong, and brands started proliferating into specialty retailing. “People went to places that stood for something, to Walmart for low cost, to Bloomingdale’s for contemporary style,” Charron explained. “J.C. Penney, which was in little and big towns and stood for a lot of private labels, got out on a quasi amorphous course, when more disciplined folks gave consumers other options and clear choices.
“We can blame Ron Johnson for a lot, but I think the problem occurred prior to that time,” Charron added. “You have to look at all the things in terms of acquisitions and expansions, how Penney’s got in and out of different businesses, all the twists and turns. And you ask yourself, ‘did anybody sit down and examine what it was they wanted to be when they grew up based on consumer trends?’ I don’t think they knew what it was they wanted to be. They lost a strategic basis for being. That was the fault of management a long time ago. I do think Penney’s will ultimately go away.”
J.C. Penney Co. was founded in 1902 by James Cash Penney with the opening of a store in Kemmerer, Wyo. It was originally called The Golden Rule Store. Penney had been a partner in a handful of dry goods stores and had decided to go out on his own.
He expanded the business with stores in the Rocky Mountain States, and moved it to New York City in 1914. By 1928, there were 1,000 stores. In the Forties, Sam Walton worked at Penney’s in Des Moines, Iowa before launching Walmart in 1962.
In 1963, Penney’s issued its first catalogue, which grew into a 1,000-page book, and with the proliferation of malls nationwide, Penney’s as a key anchor, mushroomed to 2,053 stores in the Seventies. Penney’s “big book” was discontinued in 2009.
In 1994, Penney’s became among the first to pioneer the Internet with a web site and had the catalogue transfer subscriptions onto e-mail. The catalogue was eventually discontinued.
In 2006, Penney’s started rolling out Sephora shops inside its stores, which became the main traffic attraction. That same year, Penney’s hit its peak volume of more than $20 billion.
“J.C. Penney has a distinguished history. I have followed the company since 1972,” said Loeb. “During the pandemic, the company has tried to fill Internet orders as quickly as possible. Some locations offer curbside pickup, all of them will deliver to the home.”
Analysts agree that many Penney’s stores won’t be reopened, particularly in more concentrated states such as Texas. Some of the smaller Penney’s stores are only marginally profitable, kept in the black by lower occupancy and labor costs in smaller towns and are considered a distraction to management.
With the stock trading at 19 cents, investors appear to have given up on the company.
“It will be difficult to rescue the store,” said Questrom. “But the malls need Penney’s.”
“I don’t think there’s much hope for Penney’s and I feel terrible about it,” said Charron. “I knew so many of the people in leadership positions and did business with them at VF and Liz. I think they were done in by a number of factors beyond their control such as the segmentation of the market and then management didn’t understand what they were. I think private equity guys, these purely financial players with a three-to-five or five-to-seven-year timeline on what they hold on to, do much more damage to enterprises like retail than they do benefit. If Penney’s shuts down for good, in relatively short order they won’t be missed. People will fill in with the dollar stores, Kohl’s, T.J. Maxx, Marshalls, Zara, H&M and Amazon.
“As a public company with a weak, weak balance sheet there is no room to maneuver. Changing strategies on a public company under pressure is very, very difficult.”