Penney Lays Claim to the Middle of the Road
By George Anderson
While current retailing wisdom suggests that the only thing found in the middle of the road are painted lines and road kill, J.C. Penney seems to have found a place where it can successfully navigate between the extremes of discounters on one side and upscale merchants on the other.
The retailer reported a strong earnings increase for its fourth quarter “helped by strong sales of spring merchandise and its online business,” according to The Associated Press.
Ken Perkins, president of Retail Metrics, said, Penney has been successful because, “Its merchandise mix is sharper, and they have been more focused on consumer experience.”
In a separate report, this from the Chicago Sun-Times, Penney was said to be a likely buyer for the Carson Pirie Scott department store chain. Saks Inc. has put the chain up for sale to concentrate on its upscale Saks Fifth Avenue banner.
Kurt Barnard, president of Retail Forecasting said Penney and Carson Pirie Scott were a good fit. “Carson’s stores are in good locations, and J.C. Penney is under good management these days,” he said.
Moderator’s Comment: Should J.C. Penney be looking to acquire other businesses or would you prefer to see it follow a purely organic growth strategy?
What challenges and opportunities do you see for the company’s immediate future? –
George Anderson – Moderator
Carson would be a great fit… if you can get real estate in great locations…go for it and go for it with speed.
J.C. Penney’s future is bright with or without acquisitions. They have been smart and brave enough to invest in appealing to a customer that was being neglected by high-end department stores and underserved by discounters.
J.C. Penney has a lot of room for organic growth through its catalog, internet and department store operations. But I’d say the timing couldn’t be better for them to acquire Carson Pirie Scott because it’s not a necessity but rather an opportunity to grab more market share, drive additional growth and increase shareholder value.
JCP is one our most admired retailers for their turnaround, and not just within the department store sector. Their merchandise focus means more shoppable stores, their brand development has excelled, and they’re one of the best multi-channel retailers out there. They have been doing a lot of things right and the market has recognized that.
Their “hold the course” strategy laid out in their five-year plan suggests that an acquisition of Carsons may be more of a management distraction than the benefit of getting good real estate. It may also take their eye off of innovating future store concepts, such as their off-mall strategy. They have exceeded expectations in recent years due to the focus they have had on the tasks in front of them, clearly laid out in a strategic framework. And there is still upside for holding the course. Just say no to Carsons.
J.C. Penney has done a wonderful job in building itself via internal growth and they are looking sharper and more successful each quarter. Even with all of their promotional activity, Penney’s full-priced sales have helped drive gross margins higher by over a percent point while they kept a lid on costs. Those results represent good consumer acceptance of their marketing program. Operating profits are surging and, now at 7.5%, they are moving towards their goal of 9% to 9.5% in operating margins within the next few years. This is an enviable success story in retailing.
While they should be open-minded about appropriate acquisitions, the J.C. Penney paradigm is working very well and the company should continue to keep its primary focus on increasing its solid internal growth.
I’m a huge believer in Penney’s present and future, and only wish I had followed my gut and bought the stock when it hit $8.00 (pre-turnaround)! They are doing so many things right, particularly in brand development/acquisition … they didn’t rest on their Arizona laurels and, instead, set the stage for attracting tweens and boomer women before everyone else joined in the fray. Penney’s ecommerce business is enviable, with room to grow and, with Federated/May trending upscale, there’s plenty of room in the big middle of things. As for acquisitions, why should Penney’s opt out on the frenzy? Gotta strike while the iron’s hot.
Penney recently announced its 5 year strategic plan. The plan seemed ambitious and focused, although somewhat insensitive to the consumer. (Remember the comment about “getting more than their share.”) The renaissance the company is experiencing is the result of years of hard work on the fundamentals of retailing in all aspects of their business.
Sustaining the kind of momentum being generated is one of the most difficult management tasks in any industry, and particularly so in retail. Retail requires flexibility and dynamic decision making as consumer needs shift with almost stunning speed. JCP’s management will be well served to keep every eye focused on the opportunity the market place has presented to them.
Federated’s acquisition of May, the demise of Mervyn’s and Saks’ exit from the moderate department store business have created a vacuum in the “center.” Penney is filling it extremely well. Insiders can tell you chapter and verse about how the company has restructured itself and changed almost everything about “how” it goes about its business. Unfortunately, they will find that these changes were extraordinary in the moment they were accomplished, but may not be perfect for the world as it evolves over the next several years.
Staying “on top” (talk to Wal-Mart) requires focus on those core competencies which create successful differentiation. At some point, additional core competencies have to be added in order to sustain growth or profit momentum (again, talk to Wal-Mart). JCP faces difficult comps and an ever-changing consumer and business environment to overcome if it wishes to continue the perception of being “on top.”
Real estate acquisitions which are within the scope of the strategic plan or opportunistically favorable? Absolutely, so long as they do not drain resources from existing objectives. Looking outside their main business for portfolio opportunities? Please, no! Being the best in the niche Penney occupies is extraordinarily difficult. Sustaining that position requires constantly reexamining the merchandise mix, the store experience, and the infrastructure that supports both. Doesn’t that sound like a full time job for an executive team?