VideoThe journey from adolescence to middle age takes about 15 steps for shoppers at the Stonebriar Mall's J.C. Penney — the distance between the pile of Beavis and Butthead T-shirts and a luxurious, overplumped bed decked out in matching shades of sage.
As in life, though, the gulf seems much wider. Plasma TVs surround the neon-lit "tween" clothing section, pumping out music videos from dance-hall DJ Beenie Man and teen pop vocalist Katy Rose. It's brighter — and much quieter — at the nearby bedding display, where Bruce Hornsby's "Mandolin Rain" wafts from hidden speakers. It would be easy for a customer visiting either section to completely ignore the other.
This bit of display magic is just one example of Penney's effective effort to revamp its stores and store brands (such as designer Chris Madden's bedding collection) and bring customers, including younger ones, back after years of company decline. Yet the Stonebriar Mall store, a five-minute drive from Penney's Plano, Texas, headquarters, also illustrates the challenges the company faces. The mall boasts a Sears, a Nordstrom, and a Macy's, as well as numerous specialty stores. Just down the road sits a stand-alone Kohl's store.
"It is very difficult to command loyalty," says newly hired Penney CEO Myron Ullman. "Right now I would argue that in the core department-store business in the mall, [customers choose] whichever store has better parking."
Ullman officially assumes the CEO role this month — four years into a five-year effort to make Penney more than a convenient entrance to the mall. Led to date by retail veteran Allen Questrom, Penney's turnaround is widely regarded as an industry success story. But Ullman's accession was greeted by a 7 percent drop in stock price and questions about the company's future plans. Investors, it seems, know how hard it is to hold customers' attention in an industry that's as crowded as a jewelry counter on December 24 — and dominated by the behemoth that is Wal-Mart Stores.
Finance Follows Fashion
Penney's ongoing "turnaround" is not driven by a dire liquidity crisis. Although the company lost its investment-grade rating in 2000, it has plenty of cash. At the end of 2003, its coffers boasted a $3 billion hoard that equaled 55 percent of Penney's long-term debt at the end of 2003. Even CFO Robert Cavanaugh describes the turnaround first in nonfinancial terms. "It was the fashion content that needed to improve dramatically," he says. "We weren't listening to the customer."
Penney's private-label brands were languishing, he says, and both house- and national-brand fashions were stale by the time they hit the sales floor. Worse, the company's antiquated merchandising operations were delivering far too much of both. "We were what a merchant would call 'overassorted,' " says Cavanaugh. "Too many products in each space — too many men's dress shirts. We needed to edit."
Ultimately, of course, Cavanaugh is still talking about money, not shirts. Private-label brands deliver higher profit margins (300 to 500 basis points, experts say) if they sell. The private-label brands also distinguish a store from competitors carrying identical national brands. "When J.C. Penney was offering the same assortment as everyone else, it could compete only on price," says Jason Asaeda, retail analyst at Standard & Poor's. Penney's moderate-income customers, he says, "became accustomed to a discount."
In retail, finance follows fashion. In what other business would a Goldman Sachs analyst ask a CFO (in this case, Federated Department Stores CFO Karen Hoguet) whether the "acceptance of the early fall color palettes — lavenders and berry and green and so on" — constitutes an earnings risk?
But the gloss of fashion belies the vicious shelf-to-shelf combat among Federated, Penney, Kohl's, Dillard's, and Sears. Midrange department stores are fighting for a shrinking pie. "Retail is a zero-sum game," explains Asaeda. "Each gain in sales for one store equals a loss for another."
"Middle-to-upper-middle-income consumers are trading up to higher-end retailers," observes PiperJaffray analyst Jeffrey Klinefelter. At the same time, discounters like Target and Wal-Mart are eating away at sales of fashion "basics." (As Wal-Mart CEO Lee Scott recently remarked to the Wall Street Journal, "even CEOs" buy their underwear at his stores.) And as in fashion, strategies in retail are constantly changing and easily copied.
Where Penney Fell Short
Today's retail reality took the venerable Penney by surprise.
Company founder James Cash Penney was famously frugal. A replica of his first store counter — built from the packing crates in which his merchandise arrived — is on display at the company's headquarters. But elsewhere in the sprawling office park, built in 1992, is evidence of a more recent period of management complacency.
"That's the Penney of the 1990s," explains longtime investor-relations executive Eli Akresh, after this reporter returned from a trip to an expansive private bathroom in a darkened, empty executive suite.
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