QUESTROM: PENNEY’S OVERHAUL TO BE DONE ONE STEP AT A TIME

Byline: David Moin

NEW YORK — The themes seemed familiar, but the resolve for change seemed stronger. In a 90-minute presentation to analysts in Dallas Friday, J.C. Penney chairman and chief executive officer Allen Questrom reiterated that Penney’s turnaround will take three to five years, growing the top line is the number-one priority and decentralization was at the root of Penney’s problems.
But a determined Questrom cited the importance of a new, stronger management, suggested more changes would happen in that regard and said Penney’s has great opportunities in pursuing markets that other department stores have abandoned — customers over 50 and moderate, but fashionable merchandise.
He also slipped in a few forecasts, among them:
Penney’s Internet sales leaping to $450 million this year from around $300 million last year, and turning that operation profitable this year.
Continued inventory cleanups.
Developing a new prototype for Penney’s stores, though no consensus on a format has been reached.
Many investors have urged Penney’s to sell Eckerd, its drugstore chain, and claimed that there’s more value in a Penney’s breakup, but Questrom stressed no sale is considered, and that he anticipates with the aging population and continued hefty investments by pharmaceutical companies in drug advertising, Eckerd’s value will grow significantly. However, an offer that anticipates Eckerd future value would be considered, but “I don’t think anybody is going to do that,” Questrom said.
As far as the direct marketing services division, selling is still an option, he said.
On the department stores, he said that last year “began the framework for rebuilding J.C. Penney. Over the next two to five years, my goal is to see the sales growth in the 2 percent range. We’re not looking for 4 or 5, just 2. Let’s get there, so we can get back to 6 to 8 percent profitability.
“We peaked in 1994 at 8 percent. At that time we had $130 in sales per square foot,” he said, adding “decentralizing was the key reason for bad productivity. There’s no way you can market 1,150 different [store] strategies.
“Our central people never knew what was going on in the stores, but the bigger issue for why Penney’s has not done well in the last decade or more, is that when we moved here in 1987, we left most of the merchandising organization behind — 70 percent of senior merchandising executives.”
However, Penney’s did maintain “great lawyers, a great construction team and a great financial team, but didn’t have people who understood merchandising.
“In the fourth quarter, we cut and closed some unproductive stores and cleaned up a lot of inventories. That will be an ongoing process, of narrowing down and we’ve put a renewed focus on expense control. Now we begin a new life as a centralized organization.”
He said Penney’s targets families with household incomes of $30,000 to $80,000, while people in higher income brackets shop Penney’s for basic commodities.
He said Vanessa Castagna, executive vice president and chief operating officer of stores, catalog and Internet has spent much time examining the competition, and that on a quarterly basis, the team visits 20 to 30 stores at a time. “If you don’t do that, you are not being a good retailer.”
Discussing the catalog, he said that it has a sophisticated infrastructure, the business has been flat for five years and that it got too tied to the store marketing effort. “We really need to think of the catalog as a separate entity.”
He said Internet sales are planned at $450 million this year, against $300 million last year and the objective is that the Internet business becomes profitable. However, the catalog won’t make money this year, considering, “it’s a big book with a lot of unproductive pages. We’ve got to do a lot of restyling.”
Questrom called Eckerd “a good piece of equipment under the right leadership,” and corporate-wide Penney’s “has the talent and will continue to make some changes.” He also said the Penney’s customer is most affected by the energy problem, but that that should be less of a problem in the next year and a half with tax relief. “My hope is we won’t spend a lot of time in Congress coming up with tax adjustment. Whether it’s $1 trillion or $1.6 trillion, that’s a big stimulus.” Questrom said he didn’t think the economy would collapse, but with tax relief, the government should “do it sooner rather than later.
“It’s going to have less effect the longer out you go,” he said.
“The key thing is that [Penney’s] is a moderate business. For most department stores that is not their focus. That is huge.” He said Penney’s will also go after older customers, but fashionable customers, and that generally department stores don’t focus on people over 50 in terms of categories, “We will focus primarily on the apparel-textile side, curtain and drapery area, there’s a huge value proposition on the kid’s side.
“We’re really going after the broad middle market. We will spend a lot of effort on our private label and our own branding. We’re not locked into [in-store] shops. We can be a very strong classification business, where you see all your pants, all your sweaters, in one area. The way other department stores are set up, it’s very complicated to do that.”
As far as upgrading the stores, Questrom said that the team is pulling together a prototype, “but we don’t have a living model that we can agree makes sense.” However, the team has agreed that more than just new carpeting and lighting, already being put in, is required, to “really change the dynamics so you get energy.”