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Penney: Back In Fashion


Rushing through a J.C. Penney Co. (JCP) store in Plano, Tex., to buy underwear for her two girls, Anna Garlington stops to eye a pair of jeans under the a.n.a. brand name. Preferring trendier stores, the 43-year-old schoolteacher hadn't set foot in a Penney for years but was drawn by a coupon she received in the mail. The cropped jeans, called gauchos, appeal to Garlington's contemporary sense of style. "Really cool," she says, feeling the denim between her fingers.

That's the reaction Penney Chief Executive Myron "Mike" Ullman III wants with a.n.a. The stylish line of women's clothing, which is just rolling out to stores, is the retailer's largest launch ever of a proprietary store brand. It's part of a comprehensive branding strategy that Ullman hopes will bring growth to a tired section of the retail world -- the middle-market department store. That runs counter to the conventional retail wisdom that the best growth opportunities are either at the discount end of the market, like Wal-Mart (WMT) or Target (TGT), or the high end, like Nordstrom Inc. (JWN) and Neiman Marcus.

The thinking behind the a.n.a. brand says a lot about how Ullman plans to make that happen. Penney is sharpening its understanding of its customers' needs and borrowing branding practices more familiar to a consumer-products maker like Procter & Gamble Co. (PG) than a 103-year-old retail chain. The steps are aimed at erasing Penney's image as "your mother's store" and making Penney brands resonate with the shopper. "So when she walks into the store she says: 'This is my store; they get me,"' Ullman says. "Most department stores don't pull that off."

The changes are already boosting results. In November, Penney registered a 3.6% gain in sales at stores open at least a year, the highest among department stores. Analysts say its Christmas sales will show it to be one of the holiday shopping season's big winners. It'll all add up to a 57% increase in earnings for its fiscal year ending in January, to $925 million, Citigroup (C) forecasts. But investors still doubt its long-term prospects for growth. That's why Penney's stock -- trading at 13 times estimated future earnings -- has one of the lowest price-earnings multiples of any major retailer and is far below its fast-growing, off-mall rival Kohl's Corp., whose forward p-e is 19. "Investors underestimate Penney, which is why there is huge opportunity in the stock," says Citigroup analyst Deborah Weinswig.

Should the growth plan succeed, it will cap a remarkable turnaround for the once-moribund Penney, which was operating at a loss when Ullman's predecessor, Allen Questrom, joined the company in 2000. Questrom, who retired at the end of 2004, resuscitated the languishing Penney, reinvigorating its merchandise and profits by the time Ullman, 59, took the helm. Questrom also left Ullman with the largest young women's and men's apparel businesses in the country and retail Internet sales second only to those of Amazon.com Inc. (AMZN).

HIGH AIMS

In the choice of a successor, Penney needed a leader who could define a unique position in an overcrowded retail landscape -- "someone who could deal with black holes," says Melanie Kusin, vice-chairman of recruiting firm Heidrick & Struggles International Inc. (HSII), who led the search. With Ullman, Penney got an executive known for his strategic and branding skills. In his last job, he had been managing director at Paris-based LVMH Moët Hennessy Louis Vuitton, where he doubled its luxury brand holdings. Ullman has a nerve injury that limits his ability to walk long distances, but it doesn't slow him down: To get around Penney's big Plano headquarters, he parks a Segway next to his desk.

For the next chapter of Penney's revival, Ullman has set his sights high, aiming to be in the top-performing quartile of retailers in five years, judged by several benchmarks. That includes new-store growth, something that has eluded other mall-based department stores. Indeed, most of Penney's new stores will be built off the mall, where Kohl's has had much success. With 22 such stores already, Ullman says there is room for as many as 200, on top of Penney's 1,000 mall stores. With Sears Holdings Corp. (SHLD) distracted by its merger with Kmart (SHLD) and Federated Department Stores Inc. (FD) planning to take its recently acquired May Department Store Co. (FD) more upscale, he sees plenty of room to grow in the middle market. Demographics are on his side, says Ullman: "42% of consumer spending is within our target market."

The core of the growth plan is Ullman's branding strategy. Forty percent of Penney's sales are of private label brands, the highest of any department store. Seven of those brands, such as Arizona, Worthington, and St. John's Bay, are billion-dollar businesses in their own right. But while such brands can make a retailer more distinctive and offer high margins, Ullman believes they serve no purpose unless they appeal to shoppers emotionally like strong national brands such as Nike (NKE). "We looked at them more as labels," he says. Questrom started to change that by dividing shoppers into four fashion taste levels: those who wanted conservative, traditional, modern, or trendy clothing. Now, Penney could focus its assortments around those shoppers, just as a specialty apparel store like Talbots Inc. (TLB) focuses around its traditional shopper.

Under Ullman, the strategy has a greater level of refinement. He's adding more modern and trendy brands, because they offer higher sales growth, and he's further segmenting those categories. For instance, Penney's a.n.a. line fills a need for casual weekend wear for women with modern tastes. It rounds out two slightly dressier modern lines launched last spring, W and Nicole, an exclusive line by designer Nicole Miller. To make sure Penney store brands stay true to their customers, Ullman is putting dedicated design teams on each. And he has launched a brand management system, much as P&G has a single brand manager on its brands. The brand manager's role is to ensure consistency behind the brand, from apparel appearance and marketing to sales practices. "We want each brand to have a maniacal focus," says new branding head Laurie Van Brunt, who joined Penney from Limited Brands Inc. (LTD), one of the few other retailers to employ brand managers.

FASTER, FASTER

The launch of a.n.a. also demonstrates how Penney intends to develop brands more quickly and speed up the flow of new fashions through its stores. From conceptualization to first deliveries, a.n.a. took about four months to evolve. That compares with at least a year for Penney's past brand introductions. What started as about 18 pieces of apparel for the spring season will eventually be expanded to include a.n.a. accessories such as jewelry, handbags, and shoes. "We want to outfit her from head to toe so she has the entire look and it is very easy for her," says Brian Deleu, a.n.a.'s head designer. "It completes the full brand image."

Penney's recent results suggest that Ullman's plan has struck a chord with consumers. But analysts say the biggest obstacle Ullman faces in continuing his run is Kohl's, which continues to open new stores at a far faster pace than Penney. Kohl's has been boosting the fashion quotient of its private brands, launching new ones like daisy fuentes and Candie's, partly in response to Penney. According to some analysts, Kohl's is also in talks with designer Vera Wang on an exclusive line like Penney's Nicole and is moving toward a similar brand management system. Kohl's declines to comment.

By some measures, Penney is gaining ground on its rival. Research firm BIGresearch LLC shows that Penney's popularity among women as a favorite place to buy clothes rose by 13% during the last year, vs. an 8% gain for Kohl's. And Penney says the new a.n.a. brand is running 34% ahead of plan, in terms of sales. If Penney can maintain such momentum, Ullman's goal to have a growth multiple like Kohl's might not be out of reach.

By Robert Berner


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