There’s hope springing from the middle market.

This story first appeared in the April 23, 2009 issue of WWD. Subscribe Today.

Top officials from J.C. Penney Co. Inc. are sensing improving consumer trends, and at the retailer’s analysts and investors’ meeting in New York on Wednesday, they went public with their limited optimism. “We are not seeing a wild or crazy shift, but there’s been a slight uptick,” said Myron E. “Mike” Ullman 3rd, Penney’s chairman and chief executive officer.

Ullman and others cited a “stabilization” in sales patterns; increasing “visibility” or ability to project and plan; better sell-throughs on promotional merchandise requiring less clearance in the weeks ahead, and gains in the home business due to the industry shakeout and a pickup in house sales.

With signs of improvement, Penney’s revised for the second time its first-quarter earnings per share guidance to flat or slightly positive. Initially, the company was projecting a loss of 20 to 30 cents, and about two weeks ago revised it again to a loss of 5 to 10 cents.

“I never thought flat to slightly positive would look so good,” said Bob Cavanaugh, executive vice president and chief financial officer. “There clearly is a stabilization day-to-day that gives us a lot more confidence.”

Major spring clearances are expected to break in a matter of weeks, but not with the intensity and depth of last fall’s frenzy, because retail inventories are more in line across the industry. “We will see more of the traditional promotions,” said Ken Hicks, Penney’s president and chief merchandising officer.

Ullman said Penney’s is currently demonstrating “one of the best women’s apparel trends in the industry,” with dresses a top-performing category.

Elizabeth Sweney, executive vice president and general merchandise manager, said the company is working harder to “talk to customers about trend and style with great price reassurance” through such strategies as its Little Red Book, a new spring catalogue, and an interactive online runway video. She also cited the recent introduction of exclusive women’s collections I [Heart] Ronson, Allen B., as well as a.n.a. and Bisou Bisou.

Such collections have enabled Penney’s to take market share from key competitors in certain sectors, and the company is continuing with the launch of exclusive brands. In men’s wear, the executives have high hopes for the Joe Joseph Abboud line of sportswear, tailored clothing and furnishings, which will hit stores in September. The line will be exclusive to Penney’s beginning this fall. Currently, the collection is sold in fewer than 50 department store doors, including Macy’s.

Steve Lawrence, executive vice president and general merchandise manager of men’s for Penney’s, acknowledged hits and misses in American Living, which is adjusting prices downward on certain items.

Three new young men’s brands for back-to-school — RS by Sheckler, Rusty and Third Rail, a Zoo York Production — will be introduced.

“In tough economic times,” Lawrence said, “we gravitate toward offering value as well as newness. We’re trying to get on the offensive and make bold moves.”

Ullman surprised some of the analysts by alluding to the possibility of acquisitions, saying the company is “not averse to buying something if it’s a better format than building something.…It is quite clear that there is a lot of runway available to us with our existing concept. There is a lot of opportunity for in-fill in markets where we are not represented.”

One big void has been Manhattan, where Penney’s has no stores but opens its first on Sixth Avenue in the Manhattan Mall, between 32nd and 33rd Streets, in August. With an air of confidence, Ullman said the two-level, 120,000-square-foot unit will be the biggest volume store in the $18.5 billion, 1,070-unit chain, but he wouldn’t disclose his sales projection. The top three Penney’s units are located in the Bronx and Queens, N.Y., and Puerto Rico.

Ullman contended the Manhattan store won’t be handicapped by being below ground level, though other retailers believe it’s tough to draw traffic down. He said the location means lower risks associated with shrinkage, and the traffic that shows will be there to shop and not just passing through. He also cited lower costs and said he could have taken higher ground in the center but chose not to.

Ullman, however, is not bullish on taking J.C. Penney overseas. “There are very few stories of department stores working across boundaries.”

While the mood has changed for Penney’s, Ullman is still concerned, about the nation’s rate of unemployment, currently at 8.5 percent, is “probably going to be double digit before we see a turn in the other direction.” He also opened his remarks by stating, “The business climate remains challenging for everyone.”

Because of the downturn, last year Penney’s introduced a “bridge” strategy of retrenchment on different fronts, which continues. Penney’s is planning comp-store sales down 10 percent this year, though also anticipating firming up margins and positive free cash flow as much as $100 million for the year.

Penney’s won’t pull out of its “bridge” strategy to reconvene its long-term vision for growth until significant increases in mall traffic materialize, Ullman said. “The key metric is mall traffic. It has been down 6 to 7 percent over the last eight to 12 weeks. We do much better off-mall. There’s been a 5 to 6 percent difference in the traffic between off-mall and mall. We’ve got to see it flatten out.” Ullman characterized mall traffic as improving one or two percentage points in recent months, though it’s still negative from a year ago.

“We can live with lower customer spending, if there is lower availability. There is way too much space in our sector. There is 80 to 100 million square feet of department store space more than the consumer needs,” he said.

For now, the bridge plan calls for reducing inventory and capital expenditures so expansion is down to 17 stores this year and five next year. The bridge plan also calls for maintaining merchandise launches and accelerating technology advances and the value proposition.

Two years ago at an analysts’ meeting, Ullman debuted the long-range plan. “The vision hasn’t really changed,” he said Wednesday. It centers on developing “an emotional connection with customers,” inspiring them with more stylish merchandise and better services, making Penney’s the preferred choice for a retail career and establishing Penney’s as “the growth leader in the industry.”

Last year, Penney’s missed its sales plan by nearly $2 billion, yet made the cash flow target. Women’s sales are showing some life — in part benefiting from better fashion. “Pricing clarity is our number-one initiative,” Ullman said. He said shoes and cosmetics are the best-performing categories, followed by women’s apparel and accessories, while home, remains “a mixed bag.” Fine jewelry is the most troubled category.

Couponing, point-of-sale discounting and two-for-one and other deals have confused consumers about the out-the-door prices. Penney’s officials even admitted that sometimes consumers are surprised by a price lower than they expected when they check out, meaning the discount they weren’t aware of didn’t drive the sale. However, according to Mike Boylson, Penney’s executive vice president and chief marketing officer, the company has begun taking a number of steps to clarify pricing, including, in certain categories, reducing the number of prices, simplifying the discounting and improving signage. In women’s fashions, Penney’s generally maintains full price for at least 14 days, shifts to promotional pricing for four to eight weeks, depending on the item, and then clears out of the goods for about a month or so. Items are given precise dates as to when Penney’s wants them out of the stores.

Apparently, the cautious optimism at Penney’s was felt on Wall Street, which pushed several retail stocks up. Shares of Penney’s advanced 3.3 percent to $26.92 Wednesday, outperforming retail overall.

The S&P Retail Index, after rising by as much as 4.3 percent earlier in the day, settled into a milder 0.8 percent, or 2.76-point, gain to close at 331.62. The Dow Jones Industrial Average fell 1 percent, or 82.99 points, to 7,886.57 — the index’s third consecutive close below 8,000.

A Wednesday star was Destination Maternity Corp., up 44.7 percent to $10.03.



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