Strategic Finance Project
Completed By:
Crystal Gettys
May 1, 2003
North Carolina State University
1902—On April 14, James Cash Penney opens his first store, the Golden Rule Store, in Kemmerer,
Wyoming. First-day sales are an encouraging $466.59.
1911—With 22 Golden Rule Stores, sales surpass $1 million.
1913—JC Penney Co. incorporates with the new motto: “Honor, Confidence, Service, and Cooperation.”
1914—Headquarters moves to New York City.
1924—Store count reaches 500 milestone.
1927—First suburban shopping center store opens outside Portland, Oregon.
1949—JC Penney enters its first ‘drive-in shopping center’ with the opening of a store outside St. Louis.
1951—Annual sales top $1 billion. Penney operates a store in every state.
1958—Credit sales introduced.
1963—The JC Penney catalog is born. JC Penney opens its first full-line department store in King of
Prussia, Pa.
1969—Thrift Drug Co. of Pittsburgh is acquired.
1971—James Cash Penney dies at the age of 95.
1975—With annual sales of $7 billion, JC Penney sells common stock to the public for the first time.
1982—Positioning statement says Penney is primarily a department store serving the merchandise needs of
consumers who patronize shopping malls.
1983—Most hard lines merchandise is removed from stores as Penney embarks on billion-dollar store-
modernization program.
1988—Headquarters moves to Texas.
1996—JC Penney acquires the Fay, Kerr and Eckerd drug store chains, merging them and Thrift into
Eckerd Corp. a year later.
1998—Company launches JCPenney.com. New positioning statement identifies two key consumer groups
for its department stores: Starting Outs (18- to 35-year-olds beginning careers and families) and
Modern Spenders (consumers between 35 and 54 years old, often in dual-income households).
2000—Allen Questrom arrives as chairman and CEO in September.
2001—Centralized buying begins.1
2002—JC Penney reaches 100 years.
The Penney Idea -- James Cash Penney’s Philosophy
« To serve the public, as nearly as we can, to its complete satisfaction.
« To expect for the service we render a fair remuneration and not all the profit the traffic will bear.
« To do all in our power to pack the customer's dollar full of value, quality, and satisfaction.
« To continue to train ourselves and our associates so that the service we give will be more and more intelligently performed.
« To improve constantly the human factor in our business.
« To reward men and women in our organization through participation in what the business produces.
« To test our every policy, method, and act in this wise: "Does it square with what is right and just?"20
The retail industry in general has faced incredible challenges in recent years with constant consolidation and the addition of new competitors. While most retailers have fought back with updated strategies, JC Penney has previously been perceived as staid in its merchandising and slow to react to changing market conditions. It's also been roundly criticized for allowing store managers too much control.8 In 2000, angry investors demanded pay cuts and explanations from former CEO James Oesterreicher.2 He had struggled in recent years to hit upon a winning strategy for Penney's 1,100 department stores, which were being squeezed both by upscale competitors, trendier specialty competitors like Old Navy, and discount rivals such as Target, which offer quality apparel and better values than Penney.17
But in 2003, the company is no longer a “dowager on the brink of disaster.”3 In particular, 2002 Holiday sales for JC Penney were exceptional.18 In fact, increased sales combined with margin improvements and cost cutting that derive from operating efficiencies are “transforming the century-old retailer and form the basis of Allen Questrom’s optimism for a new and better JC Penney.”2 The company is reaping the benefits of centralization and improved store environments. Sales are increasing due to improved efficiencies, better layouts and better merchandising in the stores. The company has identified five strategic priorities: merchandising, marketing, store environment, expenses and people.1 These are all a part of a five-year turnaround plan for the company. Currently, the company is entering its third year of the plan, and it appears to be on target with its achievements. Allen Questrom confirmed that the Company is on track and said "what we’ve lacked was a focus on being a timely fashionable merchant. What our merchants have done is a better job of being more on the mark as to what is going on with fashion and I think our prices are more affordable than many of our competitors in the mall."19
JC Penney’s Turnaround Numbers2
Net Income (in millions) Retail Sales (in millions)
1997 $556 $29,800
1998 $594 $29,800
1999 $336 $31,700
2000 $(705) $31,800
2001 $98 $32,000
2002 $261 $32,300
Comparable-store Sales Gains (Losses)2
Department Stores Eckerd Stores
1997 (0.3)% 7.4%
1998 (1.9)% 9.2%
1999 (1.1)% 10.7%
2000 (2.4)% 8.5%
2001 3.3% 7.8%
2002 5.3% 7.3%
Stores and Sales2
1998 1999 2000 2001 2002
Sales per gross sq. ft. $134 $130 $130 $127 $133
Number of Eckerd stores 2,778 2,756 2,898 2,640 2,641
Facts:
« In 2001, comp-store sales in department stores increased 3.3%; these were the first positive results since 1997.
« In 2001, operating profit from stores and catalog more than double to $548 million from $254 million in 2000.
« Overall, corporate income from continuing operations reversed from an $886 million loss to a $203 million profit in 2001.3
For Department Stores and Catalog4
« Improve the merchandise assortments to include more fashionable items at value prices.
« Support merchandise offerings with compelling marketing programs.
« Improve the visual appeal of the store environment and catalogs.
« Reduce the expense structure to more competitive levels.
« Concentrate on placing the right people in the right jobs.
For Eckerd4
« Develop a strong management team.
« Improve product offerings.
« Offer more competitive pricing levels for general merchandise.
« Reconfigure stores to a more productive format.
« Offer additional convenient locations of stores.
JC Penney’s marketing campaign stresses “Timeless Values.” The company is no longer competing head-on with department stores or specialty stores. It’s positioned more against Kohl’s, with perhaps a little more flair and ethnic merchandise savvy.3 Penney’s goes after middle-income customers, the ones with family incomes of $30,000 to $80,000 a year.3 In 1998, the company defined a new positioning statement identifies two key consumer groups for its department stores: Starting Outs (18- to 35-year-olds beginning careers and families) and Modern Spenders (consumers between 35 and 54 years old, often in dual-income households).1 The first line of competition, however, is still within the mall. The mall is still the shopping venue of choice for Middle America.10
During the 90s, apparel was a weak point for JC Penney. The company struggled to maintain its position with younger, fashion-conscious shoppers. Penney’s decentralized culture, highly questionable buying decisions, poor store maintenance, and a jumble of brands had made a mess of the once-fashionable chain. Unsatisfied customers were bailing out. Emerging competitors, Kohl’s and Old Navy, gained the more fashionable customers that JC Penney lost.5
The company’s new approach to apparel retailing is a dominant factor in its turnaround strategy. “Penney is a company historically, and still today, that makes good-quality product in the private-label area, probably the best in the industry,” says Allen Questrom, CEO and Chairman of the JC Penney Corporation. “What we didn’t focus on was the fashion. It really didn’t matter back in the 1950s, but our TV society has changed that. Our customers in our smaller towns are interested in fashion today.”1 Although the company is challenged by the likes of Kohl’s, Old Navy, Target, and Wal-Mart, its secret is being able to offer the right product, at the right time, and at the right price.
According to Vanessa Castagna, President and CEO of JC Penney Stores, Catalog, and Internet, apparel buying has been shifted to classification merchandising, with more attention to trends. Classification merchandising means that the company is making bigger dominant statements within each classification, adding depth and more color in big items. Buyers have been organized into buying teams to deal with major vendors across classifications, to identify trends early, and to put open-to-buy dollars behind dominant statements. This shift has also allowed buying groups to negotiate better prices from dominant vendors and to take a more active role in the production of new items.5 The result is better prices and higher quality apparel. The company can now make dominant statements in new products and hot categories. For example, stores now have boutiques dedicated to capri pants, swimwear, and lingerie.
Classification merchandising also helps employees restock because they know exactly where the merchandise belongs. Duplication and clutter are reduced, leading to better inventory management as well.
Visual presentation has gained importance across the chain. The company’s goal is for the visual presentation to support its trend-right merchandise at value prices. Through the use of internal “Visual Standards” and “Impact Guides” the store is reclassifying prototype floor plans. Charles Foughty, VP and Director of store environment calls the plan “modular merchandising.” Stores are classified into six groups. Each group has its own fixed amount of square footage for every merchandise category.6 Presentation and fixturing is standardized across the country. Aisles are more spacious so that they show off merchandise and stores look clearer. Visual clutter is virtually eliminated. JC Penney has succeeded in building more convenient, attractive stores.
Classification merchandising also comes into play within store environments. JC Penney stores want customers to come in knowing exactly where to go in order to find what they are looking for. Merchandise is not organized by brand, but by category—shirts with shirts, pants with pants.
The most critical change within stores, however, has been the move to a central checkout plan. Initially the concept was tested in 14 stores. The results were good enough to justify a $50 million investment to roll out the central checkout design to every store. Stores that were tested outperformed other stores in both sales and salary savings.6 Prior to the roll out, stores had excess cashwraps that were left unstaffed. Customers ended up frustrated after waiting for assistance where no employee was stationed. This plan reduces the number of cashwraps throughout stores and positions them near center aisles and exits. The new plan also requires checkouts to be staffed 100% of the time. The overall benefit for the company is larger staffing zones and reduced workforce while still being able to provide customers with the kind of service that is expected. According to Gordon Lindsey, from company headquarters in Plano, Texas, the company is not willing to go public with quantifiable data on improvements from centralized checkouts for competitive reasons. He did, however, say that the new checkouts have made a major contribution to expense reduction as well as substantial improvements for customer service.21
After being a primarily decentralized company for 99 years, JC Penney became a centralized company in 2001. That is, the power to make decisions on merchandising, buying and pricing rested with the stores. Purchasing that used to be done at the store level, for example, created inconsistent product lines and made it tough to provide a unified marketing message. Now, purchasing has been centralized, leaving store managers to concentrate on customer service and store appearance, instead of buying.13 Allen Questrom called the shift to decentralization “revolutionary.”2 The desire to improve speed and efficiency is behind the move to centralization. Castagna points to the old, decentralized model’s reliance on processing merchandise in the back room of every store. “It was high cost, high labor and it took a lot of time. So we’re moving merchandise processing out of the back rooms and into a professional distribution center, improving productivity and increasing inventory turns and margins at less cost than the way we have been doing it.”2
The company’s aggressive construction schedule for Store Support Centers (SSC’s) will result in a more flexible, yet efficient supply chain that promotes vendor compliance, delivers floor-ready merchandise to stores and reduces markdowns. This is done by pushing purchasing and merchandising decisions closer to the date of delivery.6 This means that merchandise can reflect current sales patterns on a local, store-by-store basis. Decisions about which stores receive what merchandise can be made minutes before the goods are inducted to the sorters. Style and color decisions no longer have to be made months in advance. Also, stores are notified, prior to truck arrival, of merchandise they will be receiving. This gives stores the opportunity to prepare for receiving and store allocation.7 "This has to equate to better in-stock performance, lower markdowns, higher margins and faster turnover for J.C. Penney," says Tim Troy, senior VP and director of supply-chain management.11
Initiatives for the centralization plan include the following:
« Class-level planning. Merchandise will be tracked in more detail. Instead of planning total sports shirts, for instance, merchandise planners will manage short-sleeve woven shirts, or even a particular brand of short-sleeve woven shirts.
« Purchase-order management. This initiative is designed to track and manage every purchase order. “We’ll have end-to-end visibility and the ability to make changes on the fly,” says Steve Raish, executive VP and CIO.
« Integrated-allocation process. Under this tool, the company will optimize the placement of available inventory based on forecasted sales at the store level.
“All of these initiatives will utilize state-of-the-art hardware and world-class software in ways that were simply not possible under our old business model,” says Raish.2
Proof of improvements:
« In the fine-jewelry department, replenishment time has dropped from more than 20 day down to six, as a result of a new logistic infrastructure fueled by state-of-the-art store support centers (SSC’s). According to Beryl Raft, senior VP and General Merchandise Manager (GMM) of fine jewelry, improved efficiencies in logistics and marketing help attract an extremely important customer—the soon-to-be bride.
« Liz Sweney, senior VP and GMM of women’s apparel, says centralization is helping the company get the best product at the best price from its vendors. “When you centrally make decisions and centrally negotiate, you can leverage your size.”
« Edward Mawyer, senior VP and GMM of family footwear, says it’s not just the presentation of major brands that has changed, but the timing of the assortment. The biggest difference between our assortments today and a year ago is that we’re buying pre-peak product instead of post-peak product.”2
In 2001, Eckerd posted an operating profit of $208 million, a dramatic change form an operating loss of $76 million the year before. These are significant numbers for the company that has been a victim of poor logistics and slow-moving front-end merchandise. Wayne Harris, Chairman and CEO who came to Eckerd in October 2000, claims that pricing is the key to successful operations. “In 2001, we got our prices right,” says Harris.
The company’s larger-size new store format is visually exciting and more efficient. Other improvements include managed product flow, reduced shrinkage due to less backroom inventory, and warehouse operations due to technology advancements, all of which drive down prices.
Another factor working in Eckerd’s favor is the age of America’s citizens. Older citizens becoming more dependent on drug store products have led to pharmaceutical companies doing a better job of marketing benefits of new drugs to consumers.
When asked about the possibility of selling Eckerd, JC Penney CEO Allen Questrom seems in no hurry. “When I first came here, we felt it was a company worth $2 or $3 billion. We have since been offered double that.” Based on today’s multiples, he estimates Eckerd’s value at $8 to $11 billion.9 Arne Alsin, TheStreet.com’s “Turnaround Artist” also believes that the drug store chain could be worth as much as $8 billion.15
There is an assortment of new executive talent with experience in centralized environment as well as Penney-bred executives, all led by Allen Questrom. According to Burt Flickinger III, president of Reach Marketing, “J.C. Penney has some of the strongest fashion minds and some of the strongest fashion merchandisers in all of retail playing on the same team.”10
« Allen Questrom, JC Penney’s eighth Chairman and CEO, became the first outsider to take command of the company. Mr. Questrom has served as Chairman of the Board and Chief Executive Officer of the company since September 2000. Prior to joining the company, Mr. Questrom led Barney’s New York and Neiman Marcus. He is also well-known for leading Federated Department Stores out of bankruptcy in the early 1990s.
« Vanessa Castagna is currently Executive Vice President, Chairman and Chief Executive Officer of JC Penney Stores, Catalog, and Internet. She arrived in August 1999 after serving as Senior Vice President and General Merchandise Manager for women’s and children’s accessories and apparel at Wal-Mart Stores Division since 1996. There, she was the highest-ranking female executive before or since.
« Wayne Harris, Chairman and CEO of Eckerd Corp. Mr. Harris arrived in October 2000. He formerly served as Chairman and CEO of The Grand Union Co., but spent most of his career at The Kroger Co.
« Mr. Cavanaugh was elected Executive VP and CFO fo the company in January 2001. In addition, Mr. Cavanaugh has served as Senior VP and CFO of Eckerd Corp, VP and Treasurer of JC Penney, and Director of JC Penney Corp.
« John Budd, senior VP and Chief Marketing Officer, arrived in February 2001. Prior to joining JC Penney, Mr. Budd served in positions with May Department Stores and Federated Department Stores.
« William Cappiello, senior VM and GMM, men’s and children’s arrived in February 2001. Mr. Cappiello formerly served as President of Parisian Inc. and The Sports Authority. Cappiello most recently served as CEO of a retail consulting firm, Clicks or Mortar Inc.
« Charles Chinni, senior VP and GMM, home and fine jewelry arrived in February 2001. Mr. Chinni has served as Chairman and CEO of Strouds, and before that he was executive VP of merchandising for Kmart Corp.
« Bernie Feiwus, senior VP and Assoiciate Director of Catalog, arrived in February 2001. Mr. Feiwus formerly served as President of eRewards.com and spent 19 years with Neiman Marcus.
« John Irvin, Senior VP and President of Catalog and Internet, arrived in February 2001. Mr. Irvin formerly served as President and CEO of Spiegel.
« Edward Mawyer, Senior VP and GMM of family footwear arrived in February of 2001. He formerly served as President of JM Shoe Group and SLJ Retail, operator of Sam & Libby.
« Beryl Raff, Senior VP and GMM of fine jewelry, arrived in May of 2001 and formerly served as chairman and CEO of Zale Corp.
« Liz Sweney, Senior VP and GMM of women’s apparel, arrived in March of 2000. She formerly held positions with Kellwood Co. and Montgomery Ward & Co.
« Tim Troy, Senior VP and Director of Supply Chain Management, arrived in September of 2000. He formerly served as Senior VP of store operations and logistics with PETsMart, TruServe, and Sears, Roebuck and Co.6
Factors Influencing Today’s Shopper6
(Percentage of shoppers ranking each item as one of the three most important factors influencing satisfaction)
Easy to find clothing categories, styles or sizes 59%
Quick checkout 45%
Able to buy clearance clothing items 44%
Salesperson available to help you find or select items 10%
Being greeted when entering store or department 8%
Dressing-room assistance 5%
Salesperson advice on fit, fashion or product 2%
Follow-up call 1%
Research on the shopping experience showed a gap between what the customer was expecting and what JC Penney was providing. According to Mike Taxter, senior VP and Director of JC Penney Stores, “The importance our customer places on ease of shopping and easy checkout have risen significantly. Customers are telling us: ‘Help us find what we want quickly, make it easy for us to check out, help us maximize our time.’” This customer feedback is pushing JC Penney to make changes that reflect customer expectations. Castagna says “The customer has changed, and JC Penney has changed to match her expectations.”6
Penney views the continued migration of women to Internet commerce as an important shift that will benefit JCPenney.com. "I believe business-to-consumer Internet commerce is just getting started, and that's particularly true in the apparel arena," where women make 80% of the buying decisions, says CIO Steve Raish.
Penney has accumulated about 1 million unique Internet customers, says John Irvin, senior VP and president of catalog and Internet. Plus, "We convert the most visitors to buyers of any site of our type," he says. "The J.C. Penney brand gives us a leg up for someone to go on line and make a purchase," says Irvin.
The company intends to leverage the catalog and the store through the Internet. Line expansions through the Internet are very cost-efficient, says Raish. "When you combine that with the further leveraging of a well-oiled fulfillment capability, the sky's the limit," he says.
Unlike the catalog division, Internet sales are growing and so are the margins, the company says. Last year the Internet was profitable, with sales of about $324 million, up 10.2% from 2000. Through mid-April of 2001, sales were running 46% ahead of a year earlier, with an even higher gain in gross margin, says Irvin. "Internet will not only be big," says Questrom. "But we can make money off it."12
Penney's turnaround plan for its catalog division calls for the elimination of two catalog fulfillment centers and reallocation of 1.1 million square feet of fulfillment center space to its new department store support center network. The plan also includes the closure of 17 outlet stores and four telemarketing centers. "We believe these measures, coupled with a rapidly expanding Internet business, will further enhance profitability, improve cash flow, and lead to future growth," Questrom said. "The turnaround of Department Stores is well underway, and these actions will strengthen our direct to consumer business, uniquely positioning J.C. Penney as a three-channel retailer."16
While the other department store chains have struggled, J.C. Penney has been able to regain market share, notes Richard Hastings of Cyber Business Credit. J.C. Penney has been able to turn things around by creating a new, more positive image for itself through advertising. Also, the company's reliance on private-label products, which typically have higher profit margins than national brands, has allowed it to be flexible on price, Hastings said.14
1. Chain Store Age. “JC Penney 100th Anniversary: A Century of Progress.” Jun 2002. Vol 78 Issue 6 pp 54-55.
2. Clark, Ken. Chain Store Age. “JC Penney 100th Anniversary: At 100, JC Penney Looks Ahead.” Jun 2002. Vol 78 Issue 6 pp 45-47.
3. Forseter, Murray. Chain Store Age. “Penney’s Timeless Values.” Jun 2002. Vol 78 Issue 6 p 12.
4. JC Penney Corporation, Inc. 10-K for the year ended Jan 25, 2003.
5. Hisey, Pete. Retail Merchandiser. “The Return of Sears and Penney.” Aug 2002. Vol 42 Issue 8 pp 33-34.
6. Chain Store Age. “JC Penney 100th Anniversary: Old Vision, New Version.” Jun 2002. Vol 78 Issue 6 pp 48-52.
7. Nathan, Krish. Chain Store Age. “JC Penney Builds Flexibility into its Supply Chain.” Jun 2002. Vol 78 Issue 6 p4A.
8. Lillo, Andrea and Slott, Mira. Home Textiles Today. “Execs See Positive Changes Ahead.” Jul 31, 2000. Vol 21 Issue 46 p8.
9. Chain Store Age. “JC Penney 100th Anniversary: A Growing Phase for Eckerd.” Jun 2002. Vol 78 Issue 6 pp 72-76.
10. Chain Store Age. “JC Penney 100th Anniversary: Home at the Mall.” Jun 2002. Vol 78 Issue 6 pp 62-63.
11. Chain Store Age. “JC Penney 100th Anniversary: Meeting the Logistical Challenge.” Jun 2002. Vol 78 Issue 6 pp 64-66.
12. Chain Store Age. “JC Penney 100th Anniversary: Rewriting the book on Catalog Sales.” Jun 2002. Vol 78 Issue 6 pp 68-70.
13. Trigg, Mike. "Waiting on Penney's Turnaround." Fool.com. 26 Jan 2003.
<http://www.fool.com/news/foolplate/2001/foolplate011009.htm>
14. Wolverton, Troy. "JC Penney Beats Christmas Blues." TheStreet.com. 4 Jan 2003.
<http://www.thestreet.com/pf/stocks/troywolverton/10060721.html>
15. Alsin, Arne. "The Turnaround Report." TheStreet.com. 26 Jan 2003.
<https://secure2.thestreet.com/cap/login/TurnaroundLogin.jsp?PID=PRTR0001&OID=TURN-
&cameFrom=/k/tr/&url=http://www.thestreet.com/k/tr/>
16. "JC Penney to Cut 2,000 Jobs." Dallas Business Journal. 26 Jan 2003.
<http://dallas.bizjournals.com/dallas/stories/2003/01/06/daily51.html>
17. Forest, Stephanie A. "JC Penney Steals a Suit from Barneys." Business Week Online. 26 Jan 2003.
<http://www.businessweek.com/bwdaily/dnflash/jul2000/nf20000727_258.htm>
18. Bobala, Bob, et. al. "Retailers Say Bah, Humbug." Fool.com. 26 Jan 2003.
<http://www.fool.com/News/Take/2002/take021230.htm>
19. "JC Penney Company Inc., Chairman Statement." JCPenney.com. 26 Jan 2003.
<http://www.jcpenney.net/company/press/statement02.htm>
20. Bock, Wally. "JC Penney: 100 Years of Retail." Monday Memo.net 26 Jan 2003.
<http://www.mondaymemo.net/020722feature.htm>
21. Lindsey, Gordon. Email Interview. 24 Apr 2003.
Email me with questions or comments.