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Penney: Comeback trail?
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August 7, 2001: 5:32 a.m. ET
CEO Questrom is slowly reviving the retailer, given up for dead last year
By Staff Writer John Chartier
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NEW YORK (CNNfn) - A year ago many investors weren't optimistic about troubled department store chain J.C. Penney Inc.
Its stock plummeted from the mid-$50 range to just $8 between May and October last year as the Plano, Texas-based chain began to report lower sales that pinched the bottom line. Its stale corporate atmosphere and disorganized management structure made it next to impossible to stay afloat amid fierce competition from the likes of Kohl's Corp. (KSS: Research, Estimates), Target Corp. (TGT: Research, Estimates) and Wal-Mart Stores Inc. (WMT: Research, Estimates), analysts said.
And Penney's Eckerd drugstore chain, squeezed by stronger players such as Walgreen Co. (WAG: Research, Estimates) and CVS Corp. (CVS: Research, Estimates), the No. 1 and No. 2 chains in the sector, was like an elephant on the company's back.
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Wall Street sees value in J.C. Penney stock, which has rebounded under CEO Allen Questrom (Source: J.C. Penney) | |
"This was a company in a tailspin. The reason why this thing was a single-digit stock is there was a question about its financial viability," said one analyst who asked not to be identified.
But since the company recruited Allen Questrom, former CEO and president of upscale specialty retailer Barney's New York, to take the CEO post last September, Penney's stock has rebounded to more than $27 a share.
Now, Penney's stores are getting easier to navigate, product offerings are more appealing and, though there still are glitches here and there, customer service is improving. And Eckerd has shuttered 300 underperforming stores, sold off unprofitable units, and lowered prices on 4,000 key items.
Bear Stearns issued a report in March that valued Eckerd alone at $25 a share, which means investors are basically getting J.C. Penney (JCP: Research, Estimates) for free.
A similar report by another firm prompted Clyde McGregor to take a close look at Penney. McGregor, co-manager of the $204 million Oakmark Equity & Income Fund, liked what he saw in the company and decided to invest.
"As we became more aware of the possibilities within Eckerd, we internally raised our estimates of what it alone can be worth" McGregor said.
And Wall Street credits Questrom with the changes to date.
Questrom, who helped Barney's manage a turnaround after leading Macy's and Bloomingdale's parent Federated Department Stores (FD: Research, Estimates) out of a jam, is shaking things up at the department store most closely aligned with middle America.
"So far I think he has done quite well under very difficult and trying circumstances," said Kurt Barnard, president of Barnard's Retail Trend Report in Upper Montclair, N.J. "He's making the store more appealing and easier to shop, and has been reviewing the product mix for the last several months now and we have seen some very favorable shopper response."
Apparel has been Penney's bread and butter for decades, but a lack of "must have" fashions in recent years coupled with fierce competition from discount chains whose apparel offerings either come close to or match Penney's quality, and a slowing economy have put the squeeze on.
And some have wondered whether its too late to turn Penney around at a time when some are questioning the traditional department store business model.
For instance, rival Sears Roebuck & Co. (S: Research, Estimates) is undergoing a major restructuring. The retailer already has exited the cosmetics business, a staple of department stores, and CEO Alan Lacy is expected to announce major changes sometime in the fall.
And Federated has shuttered its moderate-priced Stern's chain, converting most to more upscale Bloomingdale's.
But several believe the comeback is already taking place.
"I think they're only in the first or second inning of a turnaround," Bear Stearns retail analyst Steve Kernkraut said. "They've done a miraculous job, but I think there's much more to come."
Questrom is changing the century-old company's internal management structure. Until he took the helm, Penney operated for nearly 100 years with a decentralized structure in which regional managers had complete control, and no one knew what the other was doing, analysts said.
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I think they're only in the first or second inning of a turnaround. They've done a miraculous job, but I think there's much more to come.
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Steve Kernkraut
retail analyst
Bear Stearns |
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Now that's changed. He promoted Vanessa Castagna, a retailing veteran who worked at Wal-Mart before taking charge of Penney's catalog business last year, to president and made other executive changes that have streamlined the chain of command and sped up the decision-making process.
And he's also managed to bring costs more in line.
Inventory levels are down 13.6 percent from a year ago. For the last two years, inventories are down 20 percent.
"They're tightening up the assortment and testing the items before they go full-bore," one analyst said.
The company also is leveraging its considerable home business with things like window treatments, and doing well despite competition from Bed, Bath and Beyond (BBBY: up $0.12 to $30.64, Research, Estimates) and Linens N Things (LIN: Research, Estimates). They've also added some items such as strollers and child car seats as well as expanding children's clothing.
"The numbers are there. They're seeing better comps (comparable-store sales)," Morgan Stanley retail analyst Bruce Missett said. "They are resetting the aisles, or just repositioning some of the product, and they're getting more competitive from a pricing point of view. But it's still a challenge. It's a very competitive environment for them."
One thing that's made Penney's restructuring a challenge aside from competition and its corporate culture has been the economy.
Since the tech bubble burst a year ago, demand for products has slumped, forcing manufacturers to cut back on production and inventory, resulting in hundreds of thousands of layoffs across the nation. When combined with high energy prices and a volatile stock market, consumer spending, which fuels two-thirds of the economy, has fallen from year-ago levels.
Since then, Americans have switched from shopping at department stores, typically seen as commanding higher prices, to discount chains where prices are lower for much of the same name-brand merchandise.
Meanwhile there's still internal work to be done. Penney's catalog business has become so unwieldy that the costs of publishing the catalogs is having an impact on operating margins, analysts said. The company offers 30 to 40 different catalogs, including their seasonal "Big Books."
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"It's a complete and utter disaster," one analyst said. "They're logging sales, but they've got expensive margins and they're losing customers like crazy. Now they have to go through margin recovery there."
But overall, Wall Street sees value in Penney, and that's a far cry from a year ago, when most thought it was a dinosaur that was about to become extinct.
"They certainly have a long way to go," Missett said. "Questrom is a guy with a great track record, and he had a great track record because he's a smart guy." 
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J.C. Penney
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