JCPenney faces downturn humbled, but determined

NEW YORK —Mike Ullman, chairman and ceo of JCPenney, declared, “I’ve been in the business 39 years. I don’t think I’ve ever seen an environment that was as unpredictable as the current environment.”

In the midst of economic mayhem dealt to retailers, JCPenney shared its strategies at the annual analysts meeting in New York City this April.

The executive panel announced that last year’s plan to open 250 stores over the next five is slowing down. Instead of opening 50 stores, the company is scaling back to 36, which will save it $200 million in capital expenditures. Renovation plans are halted as well; only 20 major store renovations will take place, instead of the planned 65. Plansfor 2009 store openings are under review. Further reductions of the store-opening plan can reduce capital expenditures to $1 billion, compared to $1.24 billion last year, said cfo Bob Cavanaugh.

Furthermore, JCPenney’s liquidity is strong at $2.5 billion in cash at the end of 2007. According to Cavanaugh, gross margins are expected to decrease this year from the 38.6% last year, total operating expenses are expected to rise from the 29.1% in 2007, and operating income will drop from 9.5% in 2007.

It should be noted that Ullman announced that annual financial guidance will not be forecasted due to the inability to offer a meaningful outlook. Although some investors appeared distraught, Craig Johnson, president of Customer Growth Partners, a retail consulting and research firm in New Canaan, Conn., doesn’t mind. “Retail is traditionally a business that has peaks and valleys,” he said. “When you add what’s going on today, if someone were to give guidance on what’s going to happen down the road, it can be a little bit of a shot in the dark.”

Instead, the company discussed a “bridge” plan to navigate through this volatile period. The issue of lagging store traffic came up repeatedly, but the retailer hopes to combat the problem by luring customers with its brand selection. Penneys’ private brands are just under 50% of its sales and deliver above-average gross profit. “No other department store has the private brand experience and capabilities that we have,” said Ken Hicks, president and chief merchant.

To keep merchandise fresh, the company has announced the upcoming launches of brands that span multiple categories. The teen department can expect Decree, a juniors’ apparel label, and Dorm Life, furnishings for back-to-school, while Linden Street will fill the gap for non-traditional home offerings.

American Living, however, has been receiving the most attention. The concept brand covers 40 categories including family apparel, home and most departments in between. Although it’s too early to truly evaluate its performance, Ullman noted that women’s dresses, children’s apparel and window coverings have done particularly well. Customers can also expect to see lines for young men’s, infants and tabletop later this year.

Another successful endeavor is Sephora. “Right now, it’s the most successful category,” said Ullman. The beauty business continues to exceed expectations with its 50 brand offerings at ‘better’ and ‘best’ price points. Even though it’s never on sale, it continues to be one of the top selling categories in stores and online. Currently, JCPenney has 72 Sephora venues in its stores, but it plans expansion to 300 locations by 2010—a notable number considering the initial launch included only five stores in 2006.

In addition to filling the store with trend right merchandise, JCPenney is working to have more frequent deliveries, shorter cycle times and exceptional customer service. The company discussed a new initiative, Customer FIRST, to bring the ‘Every Day Matters’ experience to each customer.

These efforts are especially aimed at battling poor traffic. Surprisingly, the off-mall stores are actually outperforming its mall-based counterparts. Ullman even joked that he wishes the competition to do better—just so more people come to the mall.