Penney's Five-Year Plan Looks to High-Tech and Private Labels

J.C. Penney Co. (JCP) vowed to investors it will grow sales in 2010 and increase its annual earnings fivefold over the next five years. But the department store company's management is not counting on an economic recovery or new stores to help, at least in the short term.

At a meeting with analysts, the company laid out a five-year plan it says will boost annual earnings to $5 per share by 2014, from $1.07 in 2009. The plan should also move its debt rating back to investment grade by the end of that period. It relies heavily on Penney's partnership with cosmetics retailer Sephora and design brands such as Liz Claiborne and Mango. It also involves a heavy investment in technology, both to manage stores and communicate with customers. The company plans to relaunch its jcp.com website in the next 18 months and add more in-store terminals that allow for ordering merchandise online.

"One of the advantages of almost having failed ... is we got to push the restart button," said Myron Ullman, Penney's chairman-CEO. Penney's nearly failed at the beginning of the last decade and its debt was downgraded to junk status. It recovered by shedding units such as the Eckerd drug store chain, and by improving stores and product lines.

A Successful Quarter

The Plano, Texas company had been rounding out a previous five-year turnaround plan when the recession hit in 2008. It put in place a Bridge plan that involved controlling inventory and reducing markdowns to protect profits even as sales dropped. After the holidays, Penney's management posted a succesful fourth quarter -- in spite of lower sales -- and told investors the company would come out of defensive mode in 2010.

The new five-year plan calls for annual sales to increase by more than $5 billion over the five-year term to top $23 billion in 2014, for free cash flow to rise from $200 million in 2010 to $500 million in 2014 and for a reduction in its debt-to-capital ratio from 46% to 40%. Chief Financial Officer Bob Cavanaugh said if the plan's projections come true, he expects the company's debt to see an upgrade to investment grade by the end of the five-year period.

But Cavanaugh said he does not anticipate the rising free cash flow will be used for share repurchases. The main priorities for that cash is investment in the business and reducing debt levels, he said.

Investors Yawn After Announcement

Investors were not too impressed by the announcement. Penney's shares closed down 3.12% after the meeting, to $30.48.

Penney's management it is not counting on help from any upswing in shopper spending or new store openings, at least in the short term. With unemployment at nearly 10%, it will be "a long slog" before job numbers come back to make consumers comfortable, said Ullman.

"As there is some disarray in the market, this is our chance to assert ourselves," said Ullman. Penney's plans to increase its market share, especially among young, style-conscious shoppers, who lean more to specialty stores, he said.

Penney plans to open another 75 Sephora in-store shops this year, adding to the 155 locations it has opened since signing a deal with the French cosmetics retailer. And in fall, it will launch MNG by Mango, a a "fast fashion" in-store shop developed through a deal with the Spanish retailer, and an exclusive line of Liz Claiborne apparel.

Reaching Out to Younger Shoppers

Sephora, MNG and Liz Clairborne will all help attract that 25 - to 45-year-old segment that Penney has not been reaching as effectively, said executives. Ullman said Penney has a strong following in children's and teens, but tends to lose those customers as they get older before regaining them when they start households. "She comes back when she gets a stroller," he said.

The launch of the Liz Claiborne line should lead to a double-digit percentage sales increase in the fall and will help gross profits rise by four to five percentage points, said Liz Sweeney, executive vice president and senior general merchandise manager of women's apparel. Mango is also expected to be "disruptive," especially among women, much like Sephora, she said. Sweeney noted that in stores with Sephora shops, the adjoining accessories departments have triple the sales per square foot of stores without Sephora shops.

The addition of the new brands will mean more stores will get renovated in 2010, but Penney's has no plans to expand its locations in the near future. Penney plans to focus its investment on renovating stores as it adds Sephora and the other new in-store shops. Ullman said "a handful" of new stores may open this year, but mainly as relocations of existing stores.

Big Technology Overhaul

The biggest overhaul is reserved for the technology area, where it is relaunching JCP.com in the next 18 months, investing in mobile shopping and adding in-store kiosks that allow shoppers to order merchandise items, colors and sizes not available in the store.

"It's a new look, a new day. We want to make sure that customers are pleasantly surprised," said Ullman. "I think our results will speak for themselves as we go forward."