Penney Sets Its Course

Carole Sloan, April 25, 2005

Plano, Texas — With its five year turnaround plan on or ahead of target in specific areas, JCPenney is looking for dramatic growth with an evolutionary plan for the next five years.

Among the key objectives, said Myron (Mike) Ullman III, Penney's chairman and CEO, at the company's annual analysts meeting “is to be in the top quartile in performance and profit by 2009.” He termed the next five years as “a period of dramatic growth” compared with the years since 2000 under former chairman and CEO Allen Questrom as years of “dramatic turnaround.”

Underlying everything, Ullman said, is the company's goal of being the “preferred shopping choice for middle America” — a customer base with incomes from $35,000 to $85,000 and an age range of 35 to 54. He referred to this group as the “missing middle” that represents 35 percent of the American population and 50 percent of the company's business.

“We haven't told our story (to this group) in an emotional way,” said Ken Hicks, president and chief merchandising officer.

Ullman noted that Penney intends to capitalize on the opportunities for gaining share of the middle market that is opening with the Federated/May and Sears/Kmart mergers as well as the uncertainty involving Mervyn's.

The opportunities, Ullman added, also involve real estate acquisition — an activity in which the company intends to be a key player.

Discussing the catalog/Internet business, Hicks said the Internet will reach $1 billion in sales this year, a year ahead of schedule. Internet business was in excess of $800 million in 2004. The goal is to make the three channels seamless in terms of customers' merchandise selections.

In his presentation, John Irvin, executive vice president and president of the direct business, broke out the way these businesses have changed. In 2001, the “big books” accounted for 46 percent of the total direct business; in 2004 they had dropped to 30 percent. Specialty catalogs, which are increasing in number to specific target audiences, now account for 40 percent of the direct business, down from 42 percent in 2001. Internet business in 2001 was 4 percent, and in '04 represented 30 percent of the total direct business, Irvin reported.

Overall, direct business was $2.7 billion, with more than $400 million in referral sales from the retail stores. As an example of the strength of the specialty books, Irvin said the Cooks catalog had more than $60 million in sales.

An important part of the direct business, Irvin explained, “is the extension of categories not found in the stores.” These include toys, electronics, outdoors and storage/organizers. There are 200,000 skus in the catalog/Internet mix, he said.

Looking at the overseas opportunities, Peter McGrath, executive vice president, director of product development, emphasized that the company's approach “was to be a design-driven organization,” with emphasis in quality, innovation and fit.

Penney's sourcing division has 38 designers plus a trend team, graphic and textiles groups, technical design, fabric development and color specialists.

Sourcing is in more than 60 countries with quality assurance facilities in Singapore, Hong Kong, and Dallas.

Speed-to-market is a key element in the Penney sourcing plan with considerable emphasis being placed on cycle time reduction which now can be significantly less than six months, said Hicks.

The company now has direct-to-store replenishment in six countries focusing on products including towels and sheets “which requires no investment in inventory,” McGrath explained. Overall, he added, the company has an average inventory investment of $30 million a month.

As for the situation regarding Chinese imports, McGrath sees “a challenging three years.” He predicted that quotas will be reinstated, perhaps as soon as June 1 or July 1.

Discussing Penney's marketing strategy, Mike Boylson, executive vice president, chief marketing officer, said the company is evolving from a promotional stance undertaken early in the turnaround phase.

“We began to build branding last year from our promotional strategy. Next year through '09, there will be more balance, but we must maintain our promotional intensity while we accelerate our branding efforts,” he said.

Ethnic marketing also will play a greater role in Penney's plan with a Hispanic program already in place, and other programs to follow.

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