J.C. Penney's Problems Add Up to Fewer Dollars

By ABIGAIL GOLDMAN

Jan. 15, 1999 12 AM PT

TIMES STAFF WRITER

Just down the corridor from JCPenney, the Glendale Galleria offers shoppers Macy’s, Nordstrom and Robinsons-May. Big 5 Sporting Goods has a store down the block, Linens ‘n Things sits across the street and Target is a short drive away.

That kind of competition from top-drawer, discount and specialty retailers, common throughout the country, is a big part of why J.C. Penney Co. was squeezed into one of its worst Christmas seasons ever, with sales in stores open at least a year down 7.6%, retail experts and shoppers say.

“Why settle for J.C. Penney’s?” asked securities analyst Alan Mak of Argus Research in New York. “The discounters are getting better at offering better-quality merchandise, and the top tier are having promotions as well. That leaves J.C. Penney’s in an awkward position. There isn’t much of a middle market.”

There are other problems as well: a reliance on Levi’s jeans and other merchandise that has fallen out of favor with consumers, a plethora of stores with a downtrodden look, legions of new employees and an unfinished inventory-tracking system. Those woes are just a backdrop to the fact that the entire department-store sector has suffered in recent years as consumers flock to more specialized shops.

“Seldom do I buy clothes there,” said Carole Hatem of Glendale, a Penney credit card holder who uses the store mainly as a throughway from the parking lot to the Galleria’s other offerings. “The sales at Robinsons-May, they give you more bang for the buck.”

Holiday sales figures show that Hatem has plenty of company.

May Department Stores Co., the parent of Robinsons-May and other stores, posted a 4.4% increase in sales at stores open at least a year. Federated Department Stores Co., which operates Bloomingdale’s and Macy’s, among other stores, saw their so-called same-store sales rise 5.7%.

Meanwhile, at the other end of the spectrum, discounters Wal-Mart, which reported a 9.4% gain over last year, and Target, up 7%, showed that consumers felt they offer better value than stores such as Penney.

Based on holiday sales, Sears, Roebuck & Co. seems to be likewise a problem middle child in the department store ranks, with sales up only 0.3%.

Penney’s department stores, which account for about half of the parent company’s revenue, are expected to post sales of roughly $16 billion in the current fiscal year, ranking it as the nation’s fourth-largest retailer.

Penney’s particularly bad marks this holiday season probably indicate troubles beyond being squeezed by competition, analysts said.

The store was hit hard by a shift in consumer tastes toward specialty brand names and away from such Penney staples as Levi’s, athletic shoes and other sports apparel, retail watchers said.

“These are three major categories for Penney’s,” said Joseph Ronning, an analyst with Brown Bros. Harriman in New York. “There are industrywide weaknesses in those categories, and that’s hurting them.”

Exclusive lines such as Liz Claiborne’s Crazy Horse continued to perform well for Penney. However, a National Basketball Assn. strike that further soured consumers whose enthusiasm for sports clothes was already waning and a renewed interest in hot labels from moderate-priced stores such as Gap Inc.’s Old Navy sent Penney’s apparel sales plunging.

Sales in women’s clothing decreased in the mid-single digits, said Penney spokeswoman Theda Page Whitehead. Sales in domestics, which includes furniture, also suffered a double-digit decrease, and the division that includes men’s and athletic apparel and footwear saw a drop of more than 20%, she said.

That contrasts with sales at companies such as Gap, which reported holiday sales up 19% in stores open at least a year--with Old Navy showing more than a 30% increase in December sales.

The weak performance of the division that includes Penney’s domestics was another sore spot. In contrast, Kmart, which reported an increase of 4.2% for December same-store sales, scored with its Martha Stewart domestics line, which had sales of $750 million in 1998--up 50% over 1997.

“That’s got to be coming out of somebody’s hide,” one analyst said.

Penney also has a need to update what Argus’ Mak called “dumpy-looking” stores, which in their current state contribute to the company’s market-share decline.

“They’re not pretty,” he added. “You walk into there, it’s dark and dim, and merchandise isn’t hung onto the racks the same way that it is at the top-tier stores.”

And, he noted, Penney lacks the employee dress standards that make salespeople at specialty stores models for their merchandise.

“Having a new sales force is one thing, but what’s the quality of their sales force?” Mak said. “Sales associates are a reflection of who they want their customers to be. If they aren’t put together in a neat and pleasant manner, it’s difficult to get the consumer of a certain level of taste to go into your store.”

Penney has addressed its problems in part by cutting costs. Besides shrinking the work force, it has closed stores, reducing the total to 1,166 in 1998 from 1,200 in 1997. Additionally, by the end of this month, the chain will have a fully functioning inventory system that will enable it to replenish fast-selling items quickly.

Analysts were not sanguine about the company’s outlook.

“I think Penney’s management is challenged to improve the performance quickly,” said Walter Loeb of Loeb Associates in New York. “We were disappointed that J.C. Penney is still studying the opportunity for future growth, that Penney’s is still reviewing what has happened at this late date.”

Mak said it could be that Penney’s best hope isn’t Penney at all, but rather Eckerd drugstores, the 2,800-location chain the company bought in 1996 that posted an 8.3% sales increase for December. Analysts say the drugstore division is only going to grow as an aging population turns to it as one-stop shopping marts.

While many industry observers agree that change should be in order, Mak offers the most drastic advice.

“The chain needs a big shake-up,” Mak said. “They either have to leverage their brand name and become a Wal-Mart or they have to forget about their department stores. It’s pretty clear they can’t move into the top tier.”

“They say that they realize they need dramatic change,” he added. “Where that dramatic change will come from is difficult to say. I think they are unsure of exactly where they want to go.”

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Squeezed from both ends ... (Appeared in National edition)

J.C. Penney, which saw holiday sales fall 7.6% from last year, is feeling pressure from higher-end retailers and specialty stores on one side and discounters on the other.

Percentages reflect December sales of stores open at least a year compared with December sales from 1997.

Gap, Inc.: +19%

Ann Taylor: +15.9%

Wal-Mart: +9.4%

Target: +7%

Kohl’s Corp.: +6.7%

Federated Department Stores Inc.: +5.7%

Dayton Hudson Corp.: +4.6%

May Department Stores Co.: +4.4%

Kmart: +4.2%

Limited Inc. +4%

Saks Inc.: +3%

Neiman Marcus: +3%

J.C. Penney -7.6%

Source: Goldman Sachs & Co.

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Penny Pinching

A reliance on outdated fashions and a fledgling workforce contributed to make the recent holiday sales period dismal for J.C. Penney. The company’s same store sales saw a steady decline for most of last year, with its earnings and revenues--which include the company’s drug store unit--showing an uptick in its third quarter. Quarterly earnings and revenues and percent change in monthly sales in stores open at least a year:

1998 Same store sales

Jan.: -5.4%

Feb.: +1.1

March: +1.7

April: +2.8

May: +0.4

June: -2.1

July: -5.7

Aug.: -2.4

Sept.: -6.6

Oct.: -2.8

Nov.: +4.9