Trapped Between The Up And Down Escalators

You can hardly fault J. C. Penney Co. for its near-decade-long crusade to refashion itself from a middlebrow mass merchant into a spiffy department-store chain. Retailing, after all, has long been a game tilted either toward low-cost discounters such as Wal-Mart Stores Inc. or to upscale specialists such as Ann Taylor. Penney decided to go uptown: It ditched sporting goods and home appliances while expanding its brand-name clothes, cosmetics, and jewelry. Its once-dreary stores now feature marble floors and fancy woodwork. Consumers took notice: From 1983 to 1989, Penney's earnings nearly doubled, to $802 million, while revenues jumped 46%, to $16.1 billion.

Now, however, Penney's strategy of roping in big spenders has left the retailer in a double bind. While Penney's image has improved since its days as a general retailer, the chain hasn't yet won over the most elite cosmetic and apparel suppliers. Without the carriage-trade goods, Penney just isn't attracting many upper-crust consumers.

Worse yet, tough economic times have crimped the aspirations of the kind of upscale-wannabee shoppers Penney had hoped to attract. And the chain's prices are a bit too high for its core middle-class customers. "I used to shop here before they got so fancy," says Nancy Rhodes, a sprightly elderly woman who dropped by a Penney's in Dallas recently--but only to pick up some discounted undergarments.

MARKDOWN TIME. Taken together, these factors help explain why Penney turned in positively dismal quarterly results on Aug. 13. The chain's profits plunged 63%, to $31 million, while second-quarter retail sales were down 3.5%, to $3.6 billion. For the year, the 1,300-store chain is expected to post a 5.2% drop in earnings, to $547 million, on $16.6 billion in sales, figures Rauscher Pierce Refsnes Inc.

True, the recent recession has creamed a number of retailers. Penney's woes, however, run much deeper. Through the first six months of this year, Penney's same-store sales were off 5.3%, vs. a 0.8% decrease at May Department Stores Co., which also owns Lord & Taylor, and a 1.4% increase at Dayton Hudson Corp.

To halt his company's slide, Penney Chairman William R. Howell is getting out his markdown pen. Prices will be cut on Penney's various private-label offerings. For instance, a Penney's Jacqueline Ferrar women's blazer now goes for about $89, down from $135 a few months ago. Howell, 55, also plans to adjust Penney's merchandising mix to attract more recession-weary consumers. And he's trimming capital expenditures from $600 million to between $500 million and $550 million for the year.

Tightening the screws certainly makes sense. But Penney's retreat isn't likely to help it win over more brand-name suppliers, which represent only 35% of the chain's product mix. Sure, Penney has spruced up its men's and children's apparel units with such names as Levi's and OshKosh B'Gosh. But in the key categories of women's apparel and cosmetics--accounting for 42% of total sales--it has had less success.

NO BASKET CASE. Although it recently snagged Revlon Inc.'s prestigious Ultima II line, Penney still doesn't carry Estee Lauder's popular Clinique products. Nor does it offer chic apparel labels such as Liz Claiborne and Evan-Picone. Why? For one thing, this bunch sees little reason to irk existing department store clients--or possibly cannibalize their own sales--by supplying Penney. Says Penney's Marshall Beere, a vice-president in the women's apparel division: "We'd love to have Liz Claiborne, but they're concerned about how much more distribution they can add."

Another issue: Penney hasn't entirely shaken its image as a declasse retailer. And its visibility among New York fashion houses wasn't helped much by Penney's decision in 1987 to transfer its headquarters from New York to Plano, Tex., where it will move from its temporary digs in Dallas by 1992.

What's more, Penney is still saddled with some recession-sensitive business lines, such as home furnishings, which account for 40% of its catalog and 20% of store revenues. And the housing slump has battered demand for such lines as linens and window coverings, helping to drag down Penney's second-quarter results.

Which is not to say that Penney is a basket case. While debt problems bedevil rival retailers, Penney's debt-to-capital ratio is only 42%, vs. the 59% average for department stores. Yet until Penney is taken more seriously by the Liz Claibornes of the world, it's hard to see how its upscale strategy will ever take hold. Unfortunately, in the status-conscious world of retailing, humble origins are a difficult thing to shake.

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