A Speedy Makeover at Penney's

They said it couldn't be done at the dowdy chain. But Allen Questrom has proved them wrong--so far

On Apr. 14, J.C. Penney Co. (JCP ) turned 100. For Penney, it was a birthday that bordered on the miraculous. Just two years earlier, it seemed as if the retailer might never make it. With its antiquated procurement systems, lack of a clear retailing message, and dowdy stores, Penney had seen years of falling profits. Squeezed between savvy discounters such as Wal-Mart Stores Inc. on one side and better-run midprice department stores like Kohl's on the other, it was written off by many as a hopeless dinosaur.

Then came Allen I. Questrom. The first outside CEO in the company's history, Questrom, 62, arrived in September, 2000, with a long list of successful turnarounds to his credit, including such high-end shopping spots as Neiman Marcus and Barneys New York. But could he work his magic at the decidedly mid-market, middle-American Penney--where they don't even sell the sort of high-fashion suits Questrom routinely wears to work?

Evidently, yes. Despite a tough retail environment last year, Penney racked up its first annual profit increase since 1998. Net income for fiscal 2002, ended Jan. 31, was $98 million. That's puny, coming on $32 billion in sales. But consider that in the previous year the company lost $705 million, including $488 million in restructuring charges for layoffs and store closings at Penney and its drugstore chain, Eckerd Corp. Analyst Daniel Barry of Merrill Lynch & Co. estimates Penney's net will jump to $271 million this year, on 6% higher revenues--its first real sales increase in three years. Even more encouraging: Sales at stores open at least a year rose 3.3% in 2001, better than Sears Roebuck, Dillard's, or May. They continued to climb in the first quarter.

Investors are upbeat. Penney shares, priced at 8.75 in December, 2000, are now about 21. The 96% total return over that period trounces the 19% rise in the Standard & Poor's 500 retailing index. Bill Nygren, manager of the Oakmark Fund, which bought the stock after Questrom arrived, says: "Penney still has a long way to go, but in his first year, Questrom has made great progress."

The question remains, of course, whether Questrom's fix will stick. Some skeptics still aren't sold on the viability of department stores. Even after its recent gains, they point out, Penney averages sales of $133 a square foot, vs. $281 at rival Kohl's. New York retailing consultant Howard Davidowitz gives the chain only even odds at long-term survival: "Penney used to be slow on fashions, slow on markdowns, and slow to move. Penney is going in the right direction now, but they're still a thousand miles behind."

Questrom is determined to shake off Penney's dated image, a process he estimates will take another three to four years. In addition to the cost-cutting initiatives, he has hired a cadre of outsiders to shake up the insular retailer and has begun remodeling the 1,075 Penney's--widening aisles, improving lighting, and installing centralized checkout counters. Those and other improvements cost $332 million last year. Penney's is even now a bit fashion-forward, with hot teen fashions such as Mudd and l.e.i. capri pants. ``Last year we demonstrated that we can bring people back into our stores,'' says Questrom. ``We need to be able to offer the kind of fashion you see in Neiman Marcus at Penney prices.'' The stores do look better and offer more choice these days. But the heart of Questrom's revolution is behind the scenes--in the chain's centralized purchasing system, completed just after he arrived in February, 2001. Formerly, each Penney store manager had veto power over what to stock. That often resulted in poor retailing choices and higher purchasing costs. Now, with centralized purchasing, Penney gets better deals from suppliers and holds fewer clearance sales. Penney can also buy new apparel much more often. And it has launched its first national marketing campaign: All stores finally stock the same goods. Last year, as most retailers cut marketing budgets, Penney upped its budget by 11%, to $947 million. Wall Street would love to see Questrom spin off Eckerd. There's little synergy with the 2,641-unit drug chain, which accounts for about one-third of Penney's sales. But first, Questrom wants further improvement. J. Wayne Harris, the former CEO of Grand Union supermarkets who was hired 18 months ago, turned Eckerd's 2000 operating loss of $76 million into a $208 million operating profit last year by lowering prices on many goods and improving store layouts. Eckerd faces suits in Texas and Florida alleging it overcharged for prescriptions. It denies the charges, and most analysts feel that even if Penney has to settle, the hit will be manageable. Questrom's turnaround is still a work in progress, and no one's celebrating yet. But as anyone who has passed a 100th birthday will tell you, if you've got your health, you've got everything.

By Stephanie Anderson Forest in Dallas

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