LIM COLLEGE

Revamping JC Penney
How the Department Store went from old to becoming much trendier.

Tamara.Fraser 5/27/2011

Case Synopsis
This retail industry has been spooked by the economic slowdown. With such an uncertain economy, people are shopping less and saving their money. As a result, many stores are suffering. Store chains cannot survive without robust consumer spending. As a result, retailer become smaller, close stores, cut payroll and take other strategic steps that will allow them to survive in these harsh economic times. While some stores strive in the recession, others struggle. Many companies are redeveloping and changing their strategies. This is especially the case for JC Penney. JC Penney has designed its most ambitious five-year plan and has done its largest merchandise launch ever.

Retail Industry
The retail industry is a multi-trillion dollar industry accounting total sales of about $5 trillion dollars. The industry has changed drastically in the past decades from a made-to-order market to a ready-to-wear market. Large retailers such as Sears and Wal-Mart have managed to set up huge supply/distribution chains, inventory management systems, financing pacts and wide scale marketing plans. The retail industry is divided into two category segments: Hard: Goods that include appliances, electronics, furniture, sporting goods, etc. They are referred to as hardline retailers. Soft: Include clothing, apparel, and other fabrics. Retailers try to differentiate themselves from their competition by implementing a strong strategy, which will determine how well the company performs. There are different types of retailers such as Department Stores, Discounters, and Demographic.
Department stores are large stores that offer a huge assortment of goods and

services.

Discounters offer also offer a wide array of products and services, but their

business is mainly based on price competition.

Demographics are retailers that aim at one particular segment.

During tough economic times, discount retailers tend to outperform the other retailers. However, when the economy is thriving, the opposite occurs.1

Department Store Industry

The US department store industry consists of 20 companies that operate approximately 3,000 stores with combined annual revenue of about $60 billion. Some major US department stores include Sears, JC Penney, Macys, Dillards, etc. This is a very concentrated industry, given the fact that 95% of the industry revenue is produced by the top 8 companies. Department stores carry different merchandise products, specializing primarily in apparel. Department stores were hit hard by the recession, due to the fact that shoppers began to watch their spending.

http://www.investopedia.com/features/industryhandbook/retail.asp

Retail - Department Stores

Defined by Thomson Reuters Big Lots, Inc. BIG: NYSE Dillard's, Inc. DDS: NYSE Duckwall-ALCO Stor... DUCK: NASDAQ HSN, Inc. HSNI: NASDAQ J.C. Penney Compan... JCP: NYSE Kohl's Corporation KSS: NYSE Macy's, Inc. M: NYSE Nordstrom, Inc. JWN: NYSE QKL Stores Inc QKLS: NASDAQ Saks Incorporated SKS: NYSE Sears Holdings Cor... SHLD: NASDAQ The Bon-Ton Stores... BONT: NASDAQ Village Super Mark... VLGEA: NASDAQ
Market cap. 1-day % change 1-month % change YTD % change Low High 52-week

2.8B 3.0B 47.6M 1.9B 8.4B 16.2B 12.1B 10.0B 73.9M 1.8B 8.2B 209.1M 353.5M

0.42 3.94 0.80 1.56 1.34 +0.54 +1.21 0.80 +2.89 0.62 0.21 2.31 0.68

9.86 +18.16 1.51 +1.39 0.89 +6.49 +18.73 +0.15 +3.75 0.62 3.71 19.43 3.34

+24.29 +39.59 2.52 +4.73 +13.62 +2.41 +12.25 +8.21 29.86 +4.67 +1.97 13.19 20.30

Here is how these retailers' shoppers compare with the U.S. population as a whole. Depending on who the store is targeting, they want to have close to or a higher composition of shoppers than the U.S. average. An index of 100 is considered average. Target Age 18-34 Age 35-64 Age 65 and older Education high school Education college Household size two or fewer Income less than $40,000 Income $40,000-$99,000 Income $100,000 and more 104 110 69 82 112 88 63 121 155 Neiman Marcus 99 112 70 71 115 91 55 96 240 Macy's 92 110 82 78 113 91 56 116 186 J.C. Penney 89 105 97 92 105 95 75 120 122

Source: Claritas, a Nielsen company

Company Analysis

Introduction
JC Penney has seen a persistent drop in consumer spending. In 2003 JC Penney cut 2000 jobs and closed three facilities related to its catalog business, which has struggled with a steep decline in sales over the past year. They focused too much on older high end generation. They also tried to be too many different things. As recently as the 1990s, J.C. Penney's business model was similar to that of Sears. J.C. Penney tried to sell a little of everything, including major appliances. It also owned unrelated businesses, including a bank and several drug stores (Eckerd). Deutsche Bank, senior retail analyst, Bill Dreher wonders whether now would be a good time for JC Penney to launch a line that is about 25% higher priced than similar merchandise already in the store. JC Penney has successfully reinvented itself in the past decade from a Dowdy, older-lady type fashion to one that very much hip, on trend and cool, according to Dreher. In an effort to increase long term growth, JC Penney will close unprofitable stores and exit the catalog business. This move follows an extensive review by the companys executive board and board of directors to locate areas of profitability and opportunities for sales growth. Business Description JC Penney is a US based department store retailer. It operated in 49 states in the US and Puerto. By the end of FY2010, the company operates 1,108 department stores across its geographical market. They also offer products through the internet and catalog channels. JC Penneys business is conducted through one single segment, but is broken down into product categories which include, womens apparel, home, mens

apparel and accessories, childrens apparel, womens accessories, family footwear, fine jewelry, services and others. Product categories comprise family apparel and footwear, accessories, fine and fashion jewelry, beauty products, and home furnishings. They also offer services such as styling salon, optical, portrait photography and custom decorating. The JC Penney merchandise is obtained from over 3,500 domestic and foreign suppliers. They also operate an international purchasing subsidiary which maintains buying and quality assurance inspections offices in 19 foreign countries. (datamonitor) Company History JC Penney was founded by James Cash Penney as a dry goods and clothing store in 1902, knows ad Golden Rule Store. In 1903, Penneys acquired one third partnership in Rock Springs, Wyoming Golden Rule Store and by 1904, he managed a third of Golden Rule Store and bought one third interest in it. By 1910, there were 8 store opened and by 1911, 8 more, all in partnership with Penney. By 1913, JC Penney was incorporated in Utah with 36 stores. By 1989, JC Penney had brands such as Henry Grethel, Vanity Fair, and Palm Beach. They also introduced JC Penney Television Shopping Channel on cable television. In 1992, the company moved its headquarters to Plano, Texas. In 1997, 1,100 former Thrift, Fays and Kerr drugstores were integrated with Eckerd name and format; the sale of assets of the JC Penney National Bank; and the re-organization of the company into four business units: department stores and catalog, drugstores, insurance and international.

By 1998, the retailer was struggling with slumped sales and a $70 million charge for consolidating its drugstore operations. It also closed 75 underperforming department stores. With its falling stock, they decided to sell 20% of Eckerd in the form of a tracking stock. It also sold its private label credit card operations to GE Capital and sold its store in Chile. For over 100 years, JC Penney has stayed true to its Golden Rule beginnings, with a continued commitment to care for the communities where it does business in and operate in an ethical and responsible manner. Today these commitments live on the Companys dedication to make Every Day Matters for all its shareholders. (jcp.com) Performance JC Penney CEO, Mike Ullman hopes that Ralph Laurens new American Living fashion, home and footwear line for men, women and kids will help the Penney brand to become more successful. This has helped to draw a younger customer demographic. They have also added the Sephora makeup line and two private-label lingerie lines, designed to compete with Victoria Secret. Financial JC Penney recorded revenues of $17,556 million at the end of 2010, a 5% decrease from 2009. This decline in sales was due to the continued weak consumer spending combined with the companys strategy to reduce clearance selling and unprofitable discounting. The companys 2010 operating profits accounted to $663 million, a 41.6% decrease from 2009. Operating income declined because of the non-

cash impact of the primary pension plan. New profit was $251 million, which was a 56.1% decrease compared to 2009. JC Penney Strategy In 2000, they closed about 50 department stores and 300 Eckerd drugstores. JC Penney continued to close stores the following year and changed the company name to JC Penney Corporation in January of 2002, forming a holding company under its former name. In 2003, the company sold six Mexican department stores and closed their international merchandising unit. They also restructured their international catalogue business. By 2004, they discontinued their drugstore business and sold Eckerd Drugstores to CVS Caremark. In 2006, the company launched a beauty product store with Sephora, who has been servicing JC Penneys customer online requirements through sephora.com from jcp.com. There were 5 JC Penney stores with a Sephora in then by 2006 and by 2007; the company launched American Living, a new lifestyle brand. They also opened stores in Washington, Natick, Papillion, Brighton, Eden Prairie, Flower Mound and Santa Ana. In 2007, the company launched Ambrielle, a private label lingerie brand for the modern customer at a smart price. They also launched two exclusive brands by Liz Claiborne, Liz and Co and Concepts. Liz and Co is a traditional casual womens apparel and accessories line and Concepts is a casual sportswear as well as suits and accessories for the male demographic. JC Penney also opened a new logistics center in Lathrop, California and they opened 22 new stores. In 2008, JC Penney and Kellwood launched Fabulosity, which is a fashion sportswear line designed by Kimora Lee Simmons. The company also launched Linden

Street, a new private brand of home furnishings and accessories. They also launched Dorm Life, a lifestyle brand for design savvy young adults. Other launches include Xersion, a private brand offering the modern lifestyle customer a performance wear collection that delivers style and quality at a smart price. They also opened up a store in Hammond Square. JC Penney also launched I Heart Ronson, a complete womens fashion line designed by Charlotte Ronson; and ALLEN B, a womens fashion sportswear and dress collection designed by Allen B Schwartz. These collections would be sold exclusively at JC Penney stores, jcp.com and JC Penney catalog. In 2009, JC Penney entered a partnership with OurWeddingDay.com. This is a wedding planning resource. They continued to open Sephora stores inside their department stores and they also launched 3 new brands; RS by Sheckler, Rusty surf apparel and Third Rail a Zoo York Production, each catering to the young male demographic. They also partnered wit JA Apparel to launch JOE Joseph Abbud, a mens collection offering sportswear, shirts, ties, tailored clothing, outerwear and footwear. In the Fall of 2009, the company launched an iPhone application called JC Penney Weekly Deals. Customers could download this free app and browse a select group of store-advertised sale items that are featured in the latest weekend sales circular. They can also create portable shopping lists within the application, check the latest special offers, and find the nearest store to their current location. JC Penney also launched a contemporary career sportswear brand, known as She Said, for the female professional. The company also incorporated a program in association with Cellfire to

help shoppers conveniently ring up savings with an innovative cell phone coupon program. Customers are able to download and carry coupons on their mobile phones that can be scanned directly from the phones display screen to the register. Some other launched for JC Penney has been, Olsenboye, and exclusive new juniors brand created by Mary Kate and Ashley Olsen and One Kiss by Cindy Crawford, a fine jewelry brand. At the end of 2009, JC Penney announced that JC Penney would become Mangos exclusive department store retailer in the US for MNG by Mango. In 2010, the company announced a lifestyle collection for girls age 8-12, called Supergirl by Nastia Liukin, champion Olympic gymnast. (datamonitor) Turnaround Management JC Penneys strategy of closing underperforming stores and other businesses while focusing on more exclusive merchandise has been paying off. 2011, first quarter net income has raised nearly 7 percent. This shows that the JC Penney middle class customers are still willing and able to spend, all while dealing with the increased prices of gasoline, groceries and some clothing. JC Penney has managed to cut cost by closing some stores, outlets and call center. According to CEO, Ullman, there would be more cost savings, including trimming marketing expenses and managing inventory more efficiently. 2 The internet has finally caught up with JC Penney. After 50 years of printing catalogs, they finally decided to shut the busines down. At one point, JC Penneys catalog business had billions of dollars in sales, but as shoppers migrate online, the catalog business is now weighing the company down. There is a high cost of sending

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catalogs and it does not make sense when you can do it more effectively through the web. We are focused on increasing profitability and accelerating our growth. To achieve this we undertook a thorough evaluation of our operations to ensure we are managing costs and allocating our resources to the strategies that will best drive both our top and bottom line, with the objective of delivering enhanced returns to shareholders, says Ullman. Competition Sears Holdings Corporation Sears Holdings is the nations fourth largest broadline retailer. It has over 4,000 full line and specialty retail stores in the US and Canada. It is a leading retailer in home appliance, tools, lawn and garden, consumer electronics and automotive repair and maintenance. With more than 11 million service calls made annually, the company is the nations largest provider of home services. Sears Holdings Corporation operates through its subsidiaries, including Sears, Roebuck and Co. and Kmart Corporation. In March, 2005, there was a merger between Kmart and Sears as SHC. Sears Holdings operates both stores and continues to market products under brands held by both companies3. Overall, the company operates 3,900 retail locations under Sears, Sears Grand, Sears Essentials, Sears Hometown Stores, Sears Hardware, Kmart, Big Kmart, Super Kmart, The Great Indoors, Orchard Supply Hardware, and Lands Ends stores. On May 19, 2011 Sears released a statement announcing larger than expected loss for the quarter. They have attributed their loss to poor customer service and lousy upkeep of the stores. In 2005, after the Sears and Kmart merger, Sears has suffered
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http://www.searsholdings.com/about/

financially since each year. For the first quarter Sears announced a net loss of $170 million which is a disappointing compared to a net profit of $16 million the year before. Sales dropped 5.2% including 1.6% decrease to Kmart sales. Compared to the year before the first quarter sales seemed sluggish with a drop of 3.4% to $9.71 billion4. Target Corporation Target is an American retail company that is headquartered in Minneapolis, Minnesota. Behind Wal-Mart, it is the second largest retailer is the US. It was founded in 1902 as the Dayton Dry Goods Company. The first Target store opened in 1962 in Roseville, Minnesota. It grew and eventually became the largest division of Dayton Hudson Corporation. In January of 2000, Dayton Hudson Corporation changed its name to Target Corporation. Between 75 and 80 percent of the corporation's total sales and earnings came from the Target stores. Under the Target Corporation are Daytons, Hudsons, Marshall Fields, and Mervyns. In 2001, the Daytons and Hudsons stores were operated under the Marshall Fields brand. In 2004, Target sold the Marshal Fields chain to May Department Stores in St Louis, Missouri5. Targets first quarter started off strong with net earnings of $689 million compared to last year of $671 million. Target being the competitor to Sears has made a strong effort to upkeep their stores and develop a great reputation for a customer service and clean environment. Their strong earnings are partially due to their increased effort in their credit card segment. Their sales this year are weaker than they would have hoped, but yet have increased by 2.8% in the first quarter to $15.6 billion in 2011
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http://www.reuters.com/article/2011/05/19/us-sears-idUKTRE74I29U20110519? type=companyNews
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compared to $15 billion from 2010. The Target credit card gives back 5% in reward points which has helped customers look beyond the short term nerves of spending. In 2011 the expenses have decreased by 4.2%. Target has aggressively gone after customers via rewards to gain a loyal customer base. They attribute their strong earnings to the recent expansions of new stores. Kohls Corporation Kohls is an American department store chain headquartered in Menomonee Falls, Wisconsin. Kohls operates 1,050 plus discount department stores in 49 states, with more than a quarter of the stores in the Midwest. It was founded in 1962 by Max Kohl as a small grocery store, which later developed into a supermarket chain and then a retail store. Kohls has grown from a regional to a national department store, expanding into new markets in every region if the US. They have 9 distribution centers, each serving 100 store locations. They also have a tenth center that fulfills the ecommerce sales requirements. In the first quarter of 2011, Kohls net income was $211 million compared to $199 million the previous year. Net sales were $4.2 billion which is an increase of 3.1% for the quarter6.

Looking Forward http://www.reuters.com/article/2011/05/12/idUS138406+12-May2011+BW20110512

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JC Penney has been performing well overall. They have been able to successfully navigate the changing retail climate over the past two decades and continue to bring new and exciting innovations to the stores such as the Sephora boutique, introducing MNG by Mango and staking claim to the Liz Claiborne line of women wear. 7 The companys vision is to be Americas shopping destination for discovering great styles at compelling prices. They continue to focus on getting their customers to spend more with them, while finding ways to engage the other half to experience their great style and quality at smart prices. Their long range plan is intended to drive profitable sales growth, enhance their financial performance and achieve industry leadership. The question remains, whether or not they can keep up sales performance in an economy where people still continue to watch their money. Though the company has changed its look, can they still survive in todays tough economy and what more can they do to make sure their vision is met?

http://www.walletpop.com/2011/01/24/jcpenney-exiting-catalog-business-finally/

Reference

http://www.investopedia.com/features/industryhandbook/retail.asp http://www2.tulsaworld.com/business/article.aspx? subjectid=53&articleid=20110517_46_E1_ULNSbI502327 http://www.searsholdings.com/about/ http://www.reuters.com/article/2011/05/19/us-searsidUKTRE74I29U20110519?type=companyNews http://en.wikipedia.org/wiki/Target_Corporation http://www.reuters.com/article/2011/05/12/idUS138406+12-May2011+BW20110512 http://www.walletpop.com/2011/01/24/jcpenney-exiting-catalogbusiness-finally/ J.C. Penney Corporation, Inc., Company Profile. Dataminitor. June 2010 J.C. Penney Corporation, Inc. Profile. Hoovers. 2011