J.C. Penney to Shut 300 Stores; Gap to Open 600
Two of the nation’s largest retailers on Thursday announced plans that highlight the growing divide between the industry’s strong and weak performers, with Gap Inc. outlining a major expansion while J.C. Penney Co. detailed another retrenchment.
Gap, the king of apparel retailing, reported strong fourth-quarter profit and said it plans to open more stores this year than ever before. Meanwhile, Penney, one of the nation’s largest and oldest department store chains, said another disappointing quarter will result in the closure of as many as 45 Penney stores and nearly 300 of its Eckerd drugstores.
Penney Chairman James E. Oesterreicher said the company has not determined which stores will be shuttered, but added that most being eyed for closure are losing money. Penney, founded in 1902 and now based in Plano, Texas, operates more than 1,500 department stores nationwide, including more than 80 in California. Eckerd doesn’t have any stores in the state.
San Francisco-based Gap, the nation’s second-largest specialty retailer with brands such as Old Navy and Banana Republic as well as its namesake Gap stores, said it will add as many as 660 stores this year at a cost of about $1.6 billion. The tally includes expanding its overseas stores by about one-third with the addition of 120 to 130 stores.
“The broad-line retailers are big, confusing, unfocused and unexciting places to shop,” said retail analyst Todd Slater of Lazard Freres in New York. “Specialty stores like Gap have the advantage of being small, focused, speedy and directional. They invent the fashion.”
Specialty retailers have outshined their retail forebears, the department stores, for some time. But the slices the smaller chains have made into the larger retail pie have cut deeper for mid-line department stores such as Sears, Roebuck & Co. and Penney.
That’s because the moderate department stores have been the troubled middle child of the retail family, squeezed from above by the specialty and higher-price department stores and from below by value discounters such as Wal-Mart Stores Inc. and Target Corp.
During the last two years of healthy retail sales, the trend toward the ends of the spectrum has translated into large rewards for such companies as Gap and Wal-Mart. Many mid-level department stores including Penney, meanwhile, have been plunging in sales and profits even as they close stores and scramble to change their product mix.
Penney on Thursday reported fourth-quarter losses of $12 million, which included about $240 million in pretax charges to write down assets and a pretax gain of $55 million from the sale of credit card receivables. For the year, the company earned $336 million, a 43% downturn from 1998.
Thursday’s restructuring announcement is the second major retooling for the 98-year-old merchant in two years. In January 1998, the company said it would close 75 stores and layoff 4,900 people following weak holiday performance.
In early 1999, Penney said sales at stores open at least a year--a key measure of growth--were down 7.6% from weak year-earlier numbers. The company spent much of last year tinkering with its product mix and store design, adding in-store boutiques for its popular private-label brands such as Arizona Jeans and working to expand strong Internet sales.
And in an attempt to galvanize its sputtering stores, Penney last year broke with its long-standing tradition of promoting from within and hired Wal-Mart’s Vanessa Castagna as chief operating officer of merchandising.
Investors have been less than impressed, an attitude shared by many analysts even after the company’s cutback announcement.
“It’s good for the bottom line, but the main question remains, how do you jump-start the top line?” said Alan Mak, a retail analyst with Argus Research in New York. “It becomes very difficult to boost share price with bottom-line growth--you can only squeeze for so long before you run out of places to squeeze.”
Although Penney struggled to find its way, Sears and Kmart Corp. faced similar sales slowdowns and responded with different tactics. Sears, one of the few department stores left that still offers non-apparel goods, refocused its marketing on its tools, appliances and value-oriented appeal. Kmart turned to offering licensed products, with names including Martha Stewart, to lure customers.
Penney shares fell 69 cents to $16.19 on the New York Stock Exchange. The company has lost about $16 billion in market value during the last two years.
Gap shares were unchanged at $42.94, also on the NYSE.
The clothing company said fourth-quarter net income grew 32% to $413.9 million, with total sales increasing 27% to $3.86 billion. The company’s expansion will include 40 to 60 Banana Republic stores, 120 to 130 Old Navy locations and 320 to 340 Gap stores, including 40 to 60 Gap Body stores, which offer personal care items and intimate apparel.
“The specialty apparel model is not just the most attractive model in retail, but it’s the most attractive format for consumers,” Lazard Freres’ Slater said. “They get products faster, more fashion right and at a better value than in traditional formats like department stores.”
