Tarnished Penney Regaining Its Shine

In the summer of 2000, J.C. Penney Co. was held out as a dinosaur, an aging chain of dowdy department stores squeezed between smarter discounters such as Wal-Mart Stores Inc. and higher-priced specialty clothing retailers such as Gap Inc. Shares in Penney’s stock plummeted to less than $10 from a 1998 high of more than $77.

What a difference Allen Questrom makes.

Since taking over the helm at the Plano, Texas-based company in September 2000, the 61-year-old turnaround whiz--credited previously with reviving Neiman Marcus Group Inc., the giant Federated Department Stores Inc. and, more recently, Barneys New York Inc.--has brought Penney back to the ranks of the viable despite last year’s tough retail climate.

Although no one is yet declaring victory for the old-line retailer, which also owns the Eckerd drugstore chain, Penney investors and customers have become more bullish about the company. Penney last week reported a $95-million profit for its fiscal fourth quarter, a sharp reversal from a loss of $580 million a year ago and leading to the company’s first annual profit since 1998. Sales at Penney’s stores open at least a year rose almost 4%, its fourth straight quarter of same-store gains.

“We’re back in the game,” said Vanessa Castagna, Penney’s chief operating officer for stores, merchandising and catalog.

Questrom has moved swiftly in the first year of his five-year restructuring plan for Penney. He closed laggard stores, cut thousands of jobs, overhauled the retailer’s out-of-date buying system and moved out career Penney administrators in favor of top-flight merchants, many of whom cut their teeth at Federated and other higher-end department stores.

“He has a herculean task in front of him, but I think he’s up it,” said Bob Buchanan, an analyst with A.G. Edwards, who rates the stock a “strong buy.” “He’s done a great job in the first year.”

With its century-old roots, Penney was once the dependable choice of millions of middle-income Americans looking for good value. But for years, the retailer, like Kmart Corp., had lost market share to discounters such as Wal-Mart and Target, which lured customers with newer formats, lower prices and more fashionable merchandise.

While Penney was bound to the shopping malls, those discount stores and other lower-priced alternatives offered customers more convenient parking and the ability to get in and out faster.

Even worse for Penney, Kohl’s Corp., a Wall Street darling and suburban haven of brand names and value prices, posted quarter after quarter of winning sales and profit serving onetime Penney customers who wanted better than Wal-Mart for less money than Macy’s.

Questrom’s first moves were aimed at making structural changes that would give Penney’s stores the leaner, cleaner look and feel of some of its upstart competitors. Last year, he closed 44 of the retailer’s 1,100 stores, trimmed the number of Penney’s catalogs and pages and cut 5,000 jobs.

He also brought in top talent from throughout the retail industry, a dramatic change for a company that had promoted almost entirely from within. Questrom himself was the first outsider to be chief executive.

“Penney’s always focused on being a quality store without focusing on fashion,” Questrom said in an interview. “We think we can add a lot to our equation by adding fashion and making sure we still have the quality.”

Last month, Questrom also directed a change in the company’s corporate structure, a move that many on Wall Street interpreted as a precursor to spinning off the 2,650-store Eckerd chain, which the company acquired in 1996 for $3.3 billion.

Analysts have estimated that Penney could garner as much as $5billion for Eckerd, but Questrom has his eye on the $8 billion to $11 billion he thinks the company could be worth in two or three years. At the moment, Eckerd is contending with a lawsuit and an investigation by the Florida attorney general stemming from complaints that the chain overcharged customers for prescriptions. Eckerd said the allegation is baseless, but the legal challenges have been costly and are a major factor in the recent decline in the company’s stock price. Shares closed Wednesday at $19.71, down $1.02, on the New York Stock Exchange.

“There’s nothing worse than selling a dilapidated house or a car that doesn’t work,” Questrom said, referring to Eckerd. “It will be worth more if I can fix it.”

Questrom made his name fixing things, most notably at Federated Department Stores, which he brought out of bankruptcy in the early 1990s.

Earlier in his career, Questrom ran Nieman Marcus and reinvigorated the upscale chain. Just before joining Penney, he also brought Barneys out of bankruptcy.

At Penney, which last year reported companywide sales of more than $38 billion, Questrom is engineering perhaps the biggest change in the area that he knows best: merchandising.

With help from merchandising stars such as Castagna, a former Wal-Mart executive, Questrom is sprucing up stores and overhauling Penney’s clumsy buying system, which allowed local managers to choose the items for their stores.

The change is no easy feat, requiring Penney’s first real merchandise managers, 14 new distribution centers and new technology.

But the change allowed the company to extract better deals with manufacturers, guarantee high quality and high fashion across all stores and, for the first time, develop a national marketing campaign.

One year into a five-year turnaround, Questrom is earning cautious praise on Wall Street and in the malls.

“I used to walk through here, but I wouldn’t buy anything,” said Tina Ohanian, 20, who was shopping recently at Penney in the Glendale Galleria. “Now, we were like, wow, this stuff is cute.”

Sales in 2002 will come up against harder comparisons that include bigger expenses.

That means the stores must continue to increase same-store sales and generate strong growth in gross margins to meet analyst profit estimates of 95 cents a share for the current fiscal year, more than double the previous year.

“We’re only one step up the ladder. Now our challenge is to take the second step up the ladder, and with each step up the ladder it gets a little harder,” Questrom said. “But if you get the merchandise right and if you get the strategy right, you can get the people into your stores.”

And all of that may well depend on Questrom, which is just fine for some on Wall Street.

“No one has ever gotten rich betting against him,” said Bill Nygren, a portfolio manager at Chicago-based Oakmark Funds, which holds more than 3 million Penney shares.