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Penney alters structure
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January 28, 2002: 2:44 p.m. ET
Retailer becomes holding company; could make it easier to sell Eckerd unit.
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NEW YORK (CNN/Money) - J.C. Penney Inc. said Monday it has changed its corporate structure to a holding company format, a move one analyst says could make it easier to spin off or sell its Eckerd drugstore division.
The No. 5 U.S. retailer said the change, effective Jan. 27, better positions the company to complete its turnaround strategy.
"This structure, which is used by many companies with multiple businesses, creates a basic framework to facilitate organizational, operational and strategic decision-making," CEO Allen Questrom said in a statement.
But at least one analyst believes the change could make it easier for Plano, Texas-based Penney to spin off or sell its Eckerd drugstore division, giving the company much-needed cash to execute a turnaround plan for its core department stores.
U.S. retailers have been hard-pressed to log strong sales in the past year as consumers turned cautious amid the slowing economy and the Sept. 11 attacks. Department stores have been particularly vulnerable as discount chains with lower prices and less emphasis on apparel, siphoned customers away.
That has forced retailers to resort to steep promotions and discounts, which, while boosting sales, hurt margins and ultimately, profitability. That's where cash from selling Eckerd could come in handy.
"I think they definitely would like to sell Eckerd at some point," A.G. Edwards & Sons retail analyst Robert Buchanan said. "I don't see where a spin-off does much for them. What they need is cash to accelerate the turnaround in its core business."
Questrom, who took the helm about a year ago, embarked the department store chain on a restructuring plan to reverse sliding sales in the face of fierce competition from Kohl's (KSS: up $0.62 to $66.96, Research, Estimates) and discount chains like Wal-Mart (WMT: up $0.17 to $58.57, Research, Estimates), sloppy store appearances and lackluster customer service.
The company's sales at stores open at least a year, a key retailing gauge known as same-store sales, have been steadily improving at a time when other department stores such as Federated (FD: up $0.75 to $41.15, Research, Estimates) and May Department Stores (MAY: up $0.57 to $35.86, Research, Estimates) have been posting big drops.
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Buchanan values Eckerd at about $5 billion, which he said the company could use to further fuel its restructuring plan. Eckerd, which lags behind Walgreen's (WAG: down $0.02 to $36.57, Research, Estimates), CVS (CVS: down $0.09 to $27.94, Research, Estimates) and Rite Aid (RAD: down $0.13 to $2.68, Research, Estimates) in terms of sales, has been making a comeback of its own, improving margins under CEO Wayne Harris.
Buchanan estimates Eckerd will log a $230 million operating profit in 2001 on sales of about $13.8 billion. That's up sharply from the $40 million profit it posted a year earlier. 
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