SWOT ANALYSIS OF JC PENNEY

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J.C. Penney Company, Inc

International Directory of Company Histories

Company Perspectives

J. C. Penney Company, Inc. (NYSE: JCP), one of the nation's largest apparel and home furnishing retailers, is dedicated to fitting the diversity of America with unparalleled style, quality and value. Across approximately 1,020 stores and at jcpenney.com, customers will discover a broad assortment of national, private and exclusive brands to fit all shapes, sizes, occasions and budgets.

One of the largest retailers in the United States, J. C. Penney Company, Inc. (doing business as JCPenney), operates more than 1,020 department stores across the country and in Puerto Rico. It is one of the leading U.S. department stores and runs the nation's number one general merchandise catalog operation. Its merchandise falls into eight categories: home furnishings, women's apparel, men's apparel, children's apparel, footwear, fine jewelry, beauty products, and accessories. In-house brands include Worthington, Every Day Matters, Okie Dokie, St. John's Bay, The Original Arizona Jean Company, and Decree.

The Golden Rule: 1902-19

James Cash Penney started his first retail store in 1902 in Kemmerer, Wyoming, a small mining town. He was 26 years old and had grown up on a farm near Hamilton, Missouri. Two years after graduating from high school, Penney went to work for a local retailer, J. M. Hale & Bros. Penney's health suffered while he was in the Midwest, and his doctor advised him to move to the cooler climate of Colorado. After several ups and downs in Longmont, Colorado, Penney started working for the Golden Rule Mercantile Company, a dry goods retailer founded by Thomas M. Callahan. Callahan soon promoted young Penney to his Evanston, Wyoming, store to work with one of his partners, W. Guy Johnson.

Penney put in three years as a salesman, and Callahan and Johnson decided to make him a manager and partner. Penney chose to open his first Golden Rule store in Kemmerer because many of his Evanston customers lived there. The local banker cautioned Penney against opening a "cash only" store, as three others had failed in Kemmerer, but Penney did not want to accept mining company scrip or credit. Penney invested his whole savings, $500, and had to borrow $1,500 to be the third partner, with Callahan and Johnson, in the Kemmerer store. Penney's instinct proved correct. The store had $28,898 in sales its first year.

In 1907 Callahan and Johnson dissolved their partnership and Penney bought them out, taking over three stores. He implemented the principles of his former partners and expanded the chain throughout the Rocky Mountains by allowing his store managers to buy a one-third partnership in new stores, provided they had a trained salesperson to take their place as manager at the old store. He established a central buying and accounting office in Salt Lake City, Utah, in 1909, and had 34 stores with more than $2 million in sales by 1912. In 1913 Penney incorporated the company as J. C. Penney Company, Inc. He moved the corporate headquarters to New York City a year later to be closer to manufacturers and suppliers.

By 1915 the company had 83 stores and the next year ventured east of the Mississippi River for the first time with stores in Wausau and Watertown, Wisconsin. Penney became chairman of the board in 1917, when the company had 175 stores and sales of $14 million, and Earl Sams became president. The company continued to open stores

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at a fast clip. Private-label brands were a major reason for the success of the company. Customers liked them because of controlled quality yet lower prices than brand names. Penney liked them because he could determine the price and make a higher profit margin. Belle Isle, Ramona, Honor Brand, and Nation Wide were private-label names for piece goods, and Big Mac, Waverly, and Lady Lyke were labels on work shirts, men's caps, and lingerie, respectively.

Rapid Growth and Expansion

During the next several years, the company's growth was explosive. As Penney's personal wealth increased, so did his charity. Although he had quietly been giving thousands of dollars to local churches and organizations, in 1923 he founded Penney Farms, a 120,000-acre experimental farming area in northern Florida for down-on-their-luck farmers. In 1925, when the company's 674 stores generated sales of $91 million, Penney was again giving some of his good fortune back, this time by establishing the J. C. Penney Foundation to fund a myriad of family-related agencies. The next year, when the company opened an 18-story office and warehouse building in New York, Penney went back to Florida and built the Memorial Home Community, a 60-acre residential tract for retired ministers, church workers, and missionaries, adjacent to Penney Farms.

The 25th anniversary was celebrated in 1927, and founder James Cash Penney declared that the company had a good shot at achieving sales of $1 billion by its 50th anniversary in 1952. The company's managers and executives, who had equity in individual stores they ran or oversaw, traded their ownership for a stake in the company as a whole. In 1929 the company was listed on the New York Stock Exchange. When the Great Depression hit, the company coped by cutting back its inventory and trying to purchase goods at lower prices so it could pass the savings on to customers. The company survived the hard times largely because it had become known for its high- quality goods and service, and people turned to JCPenney for the basic items they needed. The company's profits even increased during the Depression. By 1936 sales rose to $250 million, and the number of stores grew to 1,496.

During World War II, the company sold a record number of war bonds through its stores. Materials and merchandise were scarce, yet the company increased its sales to $500 million in 1945. In 1946 Earl Sams was promoted to chairman, with Penney as honorary chairman, and Albert Hughes, a former Utah store manager, was elevated to the presidency. The company, with 1,602 stores, opened a store in Hampton Village, Missouri, in 1949 in a "drive-in shopping district," a precursor to suburban malls. After only four years as chairman, Earl Sams died in 1950. In an unusual corporate move, J. C. Penney resumed the chairmanship instead of promoting Albert Hughes. A year before its 50th anniversary, the company reached its goal of $1 billion in sales.

In 1954 Penney created the James C. Penney Foundation (its predecessor, the J. C. Penney Foundation, went under during the Depression) to continue his philanthropy, and in 1957 he served as a charter member of the Distributive Education Clubs of America, helped create the Junior Achievement Clubs, and endowed a chair at Westminster College. At the same time, William Batten, a vice president, conducted an internal study in 1957. The results indicated the company should adapt to changing consumer spending habits, especially by beginning to sell on credit instead of for cash only. The next year, Hughes became chairman and Batten became president. The company issued its first JCPenney card and instituted other changes as a result of the study, including the introduction of major appliances, home electronics, furniture, and sporting goods.

A New Era: 1960-75

In 1962 JCPenney got into the mail-order business for the first time by buying General Merchandise Company, a Wisconsin firm with a discount store operation as well. JCPenney was different from many of its competitors with its late entry into the catalog mail-order business. Other big retailers started in mail order and then launched into retail stores. JCPenney created the Treasury discount stores from the General Merchandise discount operation. The next year, it mailed its first JCPenney catalog. In eight states, customers could order from the catalog from inside JCPenney stores. A Milwaukee distribution center supplied the goods. The company's first full-line stores, with all the new merchandise lines instituted by President Batten, opened in 1963 in Audubon, New Jersey, and King of Prussia, Pennsylvania. They were prototypes for the JCPenney stores of the next two decades.

The company needed bigger headquarters because it had grown significantly in 38 years. It built a 45-story office in New York in 1964, where the company stayed until its later move to Dallas. At the same time, Batten became the company's fourth chairman and beauty salons, portrait studios, food facilities, and auto service centers were added

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to full-line stores. Sales topped $3 billion in 1968. In 1969 the company added an Atlanta, Georgia, catalog distribution center and purchased Thrift Drug Company, its entrée into the drugstore sector.

Two years later, when James Cash Penney died at age 95, sales for the company he founded hit $5 billion and the catalog business made a profit for the first time. Able to take advantage of the fact that disposable income in the United States was rising faster than inflation, JCPenney reached its highest number of stores in 1973, with 2,053 stores, 300 of which were full-line establishments. Donald Seibert was elected fifth chairman of the board and CEO in 1974, the same year a third catalog distribution center was opened in Columbus, Ohio. The company offered, and sold, three million shares of common stock in 1975, and Sesame Street joined JCPenney's fold by signing an exclusive licensing agreement for children's wear.

While the company was riding high on these achievements, the recession that began in 1974 took its toll. JCPenney's stock plunged from a high of $51 a share to $17. Earnings dropped from $185.8 million to $125.1 million. Investors believed low-margin items such as appliances were squeezing profits, and that discount and self- service home-center stores were doing a better job than JCPenney in the hardware business. The advent and strong growth of the specialty apparel store also meant tough competition for JCPenney. Like other businesses, JCPenney rebounded and had good growth in 1975, but its executives began to suspect the company needed to be restructured.

Mass Merchandiser or Department Store?

Walter Neppl became president in 1976 (Seibert was still chairman), and the company launched its women's fashion program in five markets, designed to help the company compete against specialty stores cropping up in malls. A fourth catalog distribution center in Lenexa, Kansas, was added in 1978. By then, sales had grown to $10.8 billion, the women's fashion program was introduced in new markets, and a home furnishings line was added. As a fifth distribution center was added in 1979 in Reno, Nevada, the catalog service went nationwide. Sales of the service surpassed $1 billion, making the company the second-largest catalog merchandiser in the United States.

To continue expanding the credit policies of the company, JCPenney began accepting Visa in 1979. MasterCard was accepted the next year. The company closed the Treasury discount stores in 1980 because they were unprofitable and decided to focus resources on its JCPenney stores. In 1981, when the company's sales totaled $11.9 billion, JCPenney was the first to sell zero-coupon bonds in domestic public markets. It also reorganized its executive structure around the office of the chairman. Seibert remained chairman, Neppl moved to the new vice chairmanship, and William Howell was made an executive vice president. With these officers in place, the company launched a massive reorganization to transform the company from a mass merchant into a national department store. It would take almost a decade to achieve the goals outlined in the JCPenney stores positioning statement, issued in 1982.

The company's first order of business was to expand the fashion programs in men's, women's, and children's departments. The company also divided its stores into two categories: metropolitan (based in regional shopping centers) and geographic (based in smaller communities). A sixth catalog distribution center was also opened in 1982 in Manchester, Connecticut. With the $14 million remodeling of its key store in Atlanta, JCPenney rolled out the prototype of its latest store design. Atlanta was only the beginning. In 1983 JCPenney announced a $1 billion program to give its stores facelifts and rearrange merchandise. Apparel, home furnishings, and leisure lines would be emphasized, and auto service, hard line appliances, paint, hardware, lawn and garden merchandise, and fabrics were phased out. Its big mass merchant competitors, Montgomery Ward and Sears, continued in these lines.

Retail analysts who followed JCPenney called the company's decision difficult but necessary. These lines provided $1.5 billion in annual sales, but were keeping the company from positioning itself as a true department store. In addition, low-margin goods were preventing the company from making its profit potential. In 1983 Howell, who most recently held a vice chairmanship (along with David R. Gill, who had started with the company in 1953), was elected the sixth chairman of the board, and David Miller was named president. The company also introduced a communications system for broadcasting directly to its stores using satellite transmissions from headquarters. Merchandise buyers from the home office could show store managers, salespeople, and local buyers what merchandise was available, and the local employees could help select what goods would likely sell in their stores. This gave the company the cost-saving advantages of being centralized, but also allowed it to be sensitive to fashion and seasonal preferences in local markets.

Thrift Drug, long dormant since JCPenney purchased it, scored some big points in 1984 when several major industrial companies became mail-order pharmacy customers. Also in 1984, JCPenney purchased the First National

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Bank of Harrington, Delaware, and renamed it J. C. Penney National Bank to assist in credit and financial services. The company began accepting American Express cards as well as Visa, MasterCard, and JCPenney credit cards, and the bank issued its own Visas and MasterCards. Thrift Drug celebrated its 50th anniversary in 1985. JCPenney's total year-end sales hit $13.6 billion.

Headquarters Shift, Dramatic Turnaround

In 1986 JCPenney acquired Units, a chain of stores selling contemporary knitwear. By the next year the company was well on its way to achieving the goals set forth in 1982. Moving its corporate headquarters to just outside Dallas, Texas, JCPenney was able to cut $60 million from its annual budget although about 1,250 New Yorkers lost their jobs. JCPenney's president, Miller, added vice chairman and COO to his titles, and the company began focusing on four major merchandising groups by dividing them into separate business divisions: women's, men's, children's, and home and leisure. By the end of 1986, there were 1,482 JCPenney stores dotting the country. In 1987 the company discontinued sales of home electronics, hard sporting goods, and photo equipment in its stores. The space that became available was then used for women's apparel. Also in the late 1980s, JCPenney opened freestanding furniture stores, called Portfolio, on an experimental basis.

The company's five regional operations were narrowed to four in 1988 to make communication between merchandising divisions and stores easier. The company also launched a massive leveraged employee stock ownership plan in 1988. With its new stance as a national department store focusing on apparel, the company had benefited from its prime regional shopping center space, the most such space of all U.S. retailers. Shoppers at regional malls were there to buy clothes and accessories, not washing machines and paint, and JCPenney was poised to take better advantage of these spending habits. Earnings rebounded as a result.

In 1989 JCPenney was named the exclusive U.S. distributor for Olympic apparel. It also sold its JCPenney Casualty Insurance Company and debuted the JCPenney Television Shopping Channel. The company was not, however, immune to the intense competition and promotional atmosphere of late 1989 and early 1990, and earnings slipped slightly to $5.86 per share on sales of $16.1 billion in 1989. In 1990 Miller retired and Vice Chairman Gill took on the former's responsibilities as COO. The company also broke ground for its new corporate headquarters in Plano, Texas. It also winnowed its stores down to 1,328 by closing underperforming outlets and moved away from some of its private labels, focusing instead on major brand names such as Haggar, Jockey, Levi Strauss & Company, Maidenform, Oshkosh, Reebok, and Warner's. Earnings for 1990 fell to $4.33 per share from overall revenue of nearly $17.4 billion, slowed by the uncertainty over the Persian Gulf and the coming recession.

The next year, the full brunt of the recession and the Gulf War hit consumers and JCPenney rather hard. Retail sales fell from 1990's nearly $16.4 billion to $16.2 billion, but income and per share earnings nose-dived (from $577 million to $80 million and from $4.33 to 39 cents, respectively). While the company responded to a shaky economy and adjusted its retail businesses accordingly, its insurance division far outshined other operations with a pretax income surge of 44 percent from 1990's $55 million to $79 million in 1991. To the relief of shareholders and management alike, JCPenney rebounded in 1992 while celebrating its 90th anniversary. After relocating to its new headquarters in Plano, the company was rewarded with replenished catalog sales; record performances from JCPenney Insurance and JCPenney National Bank; retail sales of $18 billion; and a net income hike of $777 million with a return on equity leap of 18.6 percent over 1991. Further, James E. Oesterreicher was named president and Gill retired after 39 years with the company.

JCPenney's strategy of concentrating on female consumers paid off during this period. At the time, women accounted for 80 percent of apparel sales and as a result each store allocated up to 41 percent of its space. Coupled with a "contemporary and fashion-forward environment," sales rose substantially in 1992 and 1993 because of a revitalized Worthington career collection and the debut and ongoing success of new bath and body products. Another proprietary brand, the Original Arizona Jean Company (begun in 1990), soared in earnings to $400 million from the previous year's $90 million. A hip redesign of the Plain Pockets line, Arizona quickly eclipsed JCPenney's expectations, prompting a slew of additional designs in different sizes and colors. On the heels of these triumphs came a two-for-one stock split in March 1993. Year-end retail sales were just shy of $19 billion (up 5.4 percent) and income of $940 million (up 21 percent) due in part to stronger catalog sales of $3.5 billion (an 11 percent increase).

In 1994 JCPenney was still riding the crest of its Arizona wave and introduced Little Arizona denimwear for toddlers. The continued hoopla over the brand's success had even prompted longtime rival Sears to jump into the proprietary denim fray with its own line, Canyon River Blues. Everyone by this time, from consumers to analysts, took note of

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JCPenney's extraordinary turnaround. Figures for 1994 further demonstrated the company's achievement, with $20.4 billion in retail sales ($800 million from Arizona brand-wear), a 6.8 percent comparable store sales increase, and net income topping $1 billion. This year also found Oesterreicher promoted to vice chairman and CEO, W. Barger Tygart named president, and Howell in his 11th year as chairman.

Struggling, Restructuring, and Diversifying: Mid- to Late Nineties

In 1995 JCPenney's recovery lost momentum, falling short of both company and analyst expectations. Retail sales increased only 0.9 percent for the year, income fell from 1994's outstanding $1 billion to $838 million, and comparable store sales experienced a 1.4 percent drop. Accentuating the positive, the company announced that its Gift Registry (introduced in 1994) had already signed up 125,000 registrants (100,000 brides and 25,000 newborns) and planned to hit 250,000 by the end of 1996, while another new venture in home furnishings opened four new stores in 1995 (a Las Vegas store attracted 10,000 patrons on its first day alone) with plans for another 20 locations on the drawing board.

Regardless of JCPenney's retail store performance, its lesser-known businesses, comprised of its drugstore chain, insurance, and banking services divisions, scored rather well for the year. Thrift Drug, the 10th-largest drugstore chain in the nation with 645 stores in 12 states, had sales of nearly $1.9 billion in 1995 (a 20.2 percent increase) and plans for new outlets in North Carolina and New Jersey. The Insurance Group, which began reciprocal businesses services in 1990 and moved into Canada in 1992, ran up revenues of $697 million, a 22.1 percent leap. JCPenney National Bank's revenues grew 21.7 percent, with 470,000 active Visa and MasterCard accounts and receivables of $823 million.

In 1996 the company moved in several directions to regain the footing lost in 1995, including the allocation of $2.1 billion in capital expenditures to open 100 new domestic stores and refurbish 500 more over a three-year period, and the expansion of its international presence through varied licensing agreements. With the drugstore industry entering a period of consolidation, JCPenney faced a choice of selling out or expanding Thrift Drug through acquisitions. The company chose the latter, acquiring Kerr Drug, Fay's, and 200 units from Rite Aid during 1995 and 1996. In February 1997 JCPenney acquired Eckerd Corporation and its 1,750 drugstores for $3.3 billion and began rebranding all of its drugstores under the Eckerd name. JCPenney ran the fourth-largest drugstore chain in the country, with about 2,800 units. For the fiscal year ending in January 1998, drugstore revenues totaled $9.66 billion, nearly one-third of overall company revenues.

JCPenney's department store operations continued to struggle in the late 1990s, burdened by high operating costs and caught in what had developed into a difficult middle market for clothes, a market segment buffeted by competition from discounters such as Wal-Mart and from high-end retailers such as Saks Fifth Avenue. In 1998 Oesterreicher launched a series of cost-cutting initiatives, including the closure of 75 underperforming stores and the elimination of about 4,900 jobs. He also implemented a new buying strategy designed to get brand-name fashions into JCPenney stores on a much faster basis. After experimenting with Internet sales as a logical extension of the company's catalog operations, jcpenney.com was transformed into a full-scale sales channel. Online sales totaled only $15 million that first year but jumped to $102 million for the fiscal year ending in January 2000.

During this period, the company also expanded overseas through the $139 million purchase of a controlling interest in Renner, a 21-unit department store chain in Brazil in January 1999. Eckerd was bolstered in March 1999 by the $492 million acquisition of the 141-unit New York-based Genovese drugstore chain. Following the rebranding of the acquired stores, there were nearly 2,900 Eckerd outlets.

With the Eckerd unit outperforming the department stores and the company's stock sagging, JCPenney sought ways to unlock the value of its drugstore operations. Plans to issue a tracking stock for Eckerd were first announced in May 1999, but the partial initial public offering (IPO) was subsequently canceled three separate times. Needing to reduce debt, JCPenney sold its credit card operations to GE Capital for $4 billion in December 1999. That year saw another retooling of the department stores aimed at revitalizing their lagging performance. "Stores-within-a-store" were set up to highlight eight of JCPenney's top private-label apparel lines, including Original Arizona Jean, St. John's Bay, and Worthington.

The company identified two key customer segments, around which it would build its merchandising strategy and advertising campaigns: "modern spenders," primarily consisting of dual-earner households ages 35 to 54 with up to two children, and "starting outs," consisting of consumers under the age of 35 who were single or just starting a family. It was clear, however, that more drastic measures were needed for a complete turnaround. Although overall

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net sales increased 6.7 percent, department store sales actually fell 8 percent. The sales increase was wholly attributed to Eckerd, which saw its sales increase 20 percent (and Eckerd sales constituted nearly 40 percent of overall JCPenney sales). Furthermore, net income fell that year to $336 million, a 43 percent decrease over the previous year.

Questrom-Led Turnaround

In March 2000 JCPenney launched a $488 million restructuring program aimed at generating annual cost savings of $120 million. By January 2001 the company had closed 48 underperforming department stores as well as nearly 300 Eckerd outlets. In the midst of this latest restructuring, Oesterreicher announced that he planned to retire early. JCPenney then quite unexpectedly went outside the company ranks for his replacement. In September 2000 Allen Questrom was named the eighth chairman and CEO of JCPenney, the first time that an outsider had been tapped for the top position. Questrom had a reputation as a retailing turnaround artist, having previously led both Federated Department Stores, Inc., and Barneys New York Inc. out of bankruptcy. The new leader began working closely with Vanessa Castagna, who had been hired away from Wal-Mart in 1999 to become COO of the department store and catalog unit.

In early 2001 Questrom announced that an additional 44 department stores and three catalog outlet centers would be closed and about 5,500 jobs would be cut. With various charges taken for the fiscal year ending in January 2001 totaling $488 million, the company reported a net loss of $705 million on sales of $31.85 billion. In February 2001 the company's department stores were converted to centralized merchandising, a move aimed at enabling the company to introduce new fashions faster, present a uniform chain-wide image, and cut costs. In June 2001, in another debt- reduction initiative, JCPenney sold its direct marketing services unit, which included the company's insurance operations, to AEGON, N.V., for $1.3 billion.

By this time, the company's stock was on the rebound, with investors encouraged by the initial moves made by Questrom and Castagna. Given the depths of the problems at JCPenney and a hidebound corporate culture that was resistant to change, however, a complete turnaround could not happen overnight, and Questrom estimated that five years would be needed. Initial results seemed promising, including a 3.3 percent increase in comparable store sales for the company's department stores during 2001, the first positive results in that measure since 1997. JCPenney also managed to post a modest profit of $98 million for the year.

Early in 2002, as the firm celebrated its 100th anniversary, JCPenney changed its corporate structure to a holding company format. J. C. Penney Company, renamed J. C. Penney Corporation, Inc., became a subsidiary concentrating on the department stores and related catalog and Internet channels. A new holding company was created that assumed the name J. C. Penney Company, Inc. At the time, it was widely speculated that this move was designed to facilitate the eventual spin-off of the Eckerd drugstore chain. Also in 2002, the company closed another 29 underperforming department stores as overall profits improved to $405 million. The department stores posted a comparable store sales gain of 2.6 percent, among the best results in the retail industry that year.

At the same time it was overhauling the department stores, JCPenney was also restructuring its catalog business. Costs were cut and unprofitable categories were eliminated. As customers increasingly shifted from catalog shopping to Internet transactions, further changes were needed. In 2003 the company shut down its catalog- fulfillment center in Atlanta along with telemarketing offices in Atlanta and Lenexa, Kansas. These cutbacks involved the elimination of 2,000 jobs and $40 million in pretax charges. Meanwhile, the department stores were receiving a fashion injection as JCPenney reached a deal to become the exclusive distributor of Bisou Bisou women's apparel, a trendy line of sexy clothing. The flagging Arizona private-label line was transformed under the leadership of a new designer to appeal to younger customers looking for trendier clothing, backed by the most extensive advertising campaign since that of the original brand launch.

Over at Eckerd, the nation's fourth-largest drugstore chain was itself in need of a turnaround, and JCPenney executives ultimately determined that it would be best to divest that unit so that their full attention could be devoted to completing the revitalization of the core department store operations. Late in 2003 Eckerd was placed on the auction block, with JCPenney recording a $1.28 billion loss on these "discontinued" operations, resulting in a $928 million net loss for the year. In July of the following year, JCPenney sold Eckerd to the Jean Coutu Group Inc. and CVS Corporation, receiving gross cash proceeds of roughly $4.7 billion. These proceeds were subsequently used to repurchase common stock and reduce debt.

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Around the time of the Eckerd divestment, even though the five-year turnaround program was not yet completed, JCPenney began to transition into a growth mode. For the first time in several years, the company's department store count actually grew. In addition to seven new mall-based stores, the company also opened a like number of off- mall locations. The new off-mall format, which debuted in late 2003, was designed to provide JCPenney with additional growth opportunities and the ability to reach customers in areas underserved by malls. Results for 2004 were stellar: a 4.9 percent increase in comparable store sales and net profits of $524 million on revenues of $18.42 billion.

By late in 2004, investors were pleased enough with the Questrom-led turnaround effort to have pushed the company's stock up to nearly three times its price when he joined the company. With the turnaround well underway, however, JCPenney appeared at this point to need more of a branding expert than a turnaround specialist at the helm. In December 2004, Questrom stepped down, and Myron E. (Mike) Ullman III was named the company's ninth chairman and CEO. Ullman was a former executive at both R. H. Macy & Company and the French luxury goods company LVMH Moët Hennessy Louis Vuitton SA. Castagna, passed up for the top post, soon resigned.

New Era of Growth

Under Ullman, JCPenney upped its fashion quotient, launching a number of new clothing lines aimed particularly at middle-income women between the ages of 35 and 54, a core demographic group that the company had identified as underserved. Launched in 2005 were a private-label brand called a.n.a. ("a new approach") offering casual weekend wear for women with modern tastes; a "work to weekend" line called W, which was an offshoot of the Worthington private label; and Nicole, an exclusive line from high-end designer Nicole Miller positioned as "dressy casual." On the marketing front, Ullman began placing more "image" ads in an attempt to build up a following for JCPenney and make it more than just a place people shopped for the sales.

Also of note during 2005 was the launch of a new Internet-enabled point-of-sale system cut transaction times and provided customers with access to the company's much-larger systemwide assortment of merchandise right at the register. The company's Web site was one of the first to allow shoppers to pick up and return items at the firm's stores. Such initiatives helped push online revenues past the $1 billion mark in 2005. Also that year, JCPenney divested its controlling stake in the Renner department store chain in Brazil.

In perhaps the most important development in 2005, however, the company's management team developed a long- range plan for growth that signaled an official and successful end to the turnaround efforts. That year's strong comparable store sales increase of 2.9 percent, an operating profit jump of 22.5 percent, and net income of $1.09 billion on revenues of $18.78 billion all signaled a financially resurgent company. At the start of an ambitious expansion, JCPenney opened 18 new stores in 2005, the most in eight years.

Of these, 11 were off-mall, a format that was proving extremely successful, with higher sales per square foot than the traditional mall-based stores. In some cases, the company was finding it lucrative to replace an underperforming mall store with two off-mall units located nearby at sites customers deemed more convenient. Another 28 stores were opened in 2006, 23 of the off-mall variety. For the period from 2007 through 2011, JCPenney planned to open 250 new or relocated stores, including its first store in Manhattan. Between 80 and 90 percent of the openings were slated to be off-mall outlets. During the same period, the company aimed to remodel around 300 existing stores.

The plethora of new private-label and exclusive brands had proved to be one of the centerpieces of the JCPenney revival, and the rollouts continued. In partnership with high-end beauty purveyor Sephora Holdings S.A., a unit of Ullman's former employer, LVMH, JCPenney late in 2006 opened its first Sephora "store-within-the-store" cosmetic department at a new off-mall store in Fort Worth, Texas. A gradual rollout to other JCPenney stores ensued. The company had high hopes that this effort at creating a cosmetics department would succeed after the failure of previous tries.

Following the 2006 launch of the private-label Studio home furniture and accessories line, JCPenney in the spring of 2007 unveiled two new exclusive casual brands designed by Liz Claiborne: Liz & Co. for women and Concepts by Claiborne for men. The company that spring also conducted the largest launch of a private label in its history, the Ambrielle lingerie collection. Plans were also in place for an even larger launch in the spring of 2008, the introduction of the exclusive American Living classic/traditional brand, created by Polo Ralph Lauren Corporation, and slated to encompass a full range of merchandise for women, men, and children, as well as intimate apparel, accessories, and home items.

7/14/2020 Business Insights: Global

https://bi-gale-com.proxy.lib.pdx.edu/global/article/GALE%7CI2501320292/f29e91bcae011ec8bb6b787bf42d6ea5?u=s1185784 8/10

Sales Stagnate as Economic Recession Hits

At this point, on the profit front, JCPenney had outpaced such rivals as Macy's, Inc., with its 2006 operating income as a percentage of sales at 9.7 percent. JCPenney sought to build this figure up to as high as 15 percent, which would be on par with another rival, Nordstrom, Inc., by 2011. Although JCPenney appeared to be on an upward swing, some indications of a setback were evident by late 2007, perhaps as a consequence of the troubling developments in the U.S. housing market. Despite U.S. economic concerns, the company grew rapidly in 2007, opening 50 new stores.

Over the next several years, as the worldwide economic recession took hold, JCPenney aggressively pushed forward with its growth strategy of launching new brands to bolster profits. Between 2007 and 2010 it announced a series of partnerships with high profile celebrities, including Ralph Lauren, television stars Mary-Kate and Ashley Olsen, supermodel Cindy Crawford, and gymnast Nastia Luikin. New brands included American Living, Olsenboye, One Kiss, and Supergirl by Nastia. During this period JCPenney also entered partnership agreements with footwear manufacturer Aldo Group Inc. Condé Nast Publications Inc., and Hearst Magazines.

By mid-2010 JCPenney was a sizable retailer with stagnating sales and a seeming lack of direction. Seeing the company's predicament as an investment opportunity and a venue to lend his expertise, William A. Ackman stepped in and purchased a 16.5 percent stake in JCPenney through his hedge fund Pershing Square Capital Management, making him the company's biggest shareholder. Once entrenched in the company's board, Ackman became a vocal critic of chief executive Ullman's strategies, as well as what Ackman saw as the company's overreliance on excessive price discounts and cluttered stores to attract customers.

By January 2011 Ackman's arguments for a new business strategy won out. The board folded, and Ackman stepped in as company director. In June Ackman replaced Ullman with Ron Johnson as chief executive. Fresh from a series of triumphs bolstering retail sales at both Apple Inc. and Target Brands, Inc., Johnson was feted by company shareholders as a savior. Consequently the value of JCPenney's shares skyrocketed, and its equity spiked by more than $1 billion.

New Management Ushers in Major Changes: 2011-13

During the next few months, JCPenney moved forward with much the same strategy as before with its reliance on partnerships with big names to drive sales. In October 2011 it signed an agreement with Liz Claiborne Inc. to acquire the rights to both its Liz Claiborne and Monet brands for $265.5 million. Two months later, it signed a 10-year partnership agreement with Martha Stewart Living Omnimedia, Inc., for $38.5 million to carry the Martha Stewart brand. At the end of 2011 private and exclusive brands at JCPenney accounted for 55 percent of sales, and operating income stood at $832 million. In January 2012 the company counted 1,102 stores in 49 states across the United States and Puerto Rico.

Behind the scenes, however, changes were in the works. Finally, in January 2012 Johnson unveiled his four-year plan to completely transform JCPenney, much of which aligned with Ackman's proposed plans. Under this new strategy, aggressive discounts and promotions would be replaced with everyday "fair and square prices." Additionally, inventory would be trimmed, and products would be reorganized into as many as 100 mini-boutiques or stores-within-stores. Its first concept store would sell Martha Stewart-branded home goods. In an attempt to attract more affluent shoppers, JCPenney announced dozens of partnerships with trendy designer brands such as Betsey Johnson and Joseph Mimran's Joe Fresh.

In the early months of 2012, the company rolled out this new strategy. Although leaders did not expect to see immediate sales growth, quite the opposite occurred. The new changes seemed to baffle and alienate JCPenney's loyal, budget-conscious customer base. As a result, in the first three months of 2012, revenue fell by 20 percent, which created a $163 million revenue loss (the largest decline in more than seven years). Moreover, the number of JCPenney's customers fell by 10 percent. As the year wore on these numbers continued their steep decline.

At the end of 2012, JCPenney's sales had shrunk by 25 percent and the company ended up recording a loss of nearly $1 billion. To shore up losses, the company began massive layoffs, shedding upward of 19,000 jobs. By the spring of 2013 stock prices had plunged by more than 50 percent. Besieged by angry stockholders, the company's board emerged from the shadows, overruling Ackman, firing Johnson, and bringing back Ullman as interim CEO in April.

7/14/2020 Business Insights: Global

https://bi-gale-com.proxy.lib.pdx.edu/global/article/GALE%7CI2501320292/f29e91bcae011ec8bb6b787bf42d6ea5?u=s1185784 9/10

Rebuilding Profits: 2014-15

Back at the helm, Ullman returned JCPenney to its old business model, restoring frequent promotions and highlighting successful merchandise such as basic loose-fitting khakis. As the months wore on and customers failed to return, it resorted to a series of nationally broadcasted television ads with the message: "We learned a very simple thing: to listen to you, to hear what you need. ... Come back to J. C. Penney. We heard you. Now we'd love to see you" (May 2013, Los Angeles Times). In the first and second quarters of 2013 losses continued. A small ray of hope, however, emerged as online sales declines slowed significantly.

As the board continued searching for Ullman's successor, Ackman grew weary of waiting, publicly voicing his discontent with how the company was managed. By August 2013 he resigned from the board and sold his company stake for $504.4 million, $470 million less than what he had paid for it.

JCPenney continued making up for losses throughout 2013 and 2014 with Ullman at the helm. By December 2014, however, it was still struggling. As a result, in January 2015 it announced the closure of 39 department stores, bringing its total count to 1,020 locations. Finally, in the second quarter of 2015, the company saw improvements over the previous year with same-store sales increasing 4.1 percent. At this point, the company had found a new CEO and Ullman stepped down to be replaced by Marvin Ellison. Company stakeholders were cautiously optimistic that this new leader would steer the company in the right direction in the years ahead.

Principal Subsidiaries

J. C. Penney Corporation, Inc.

Principal Competitors

Dillard's, Inc.; Kohl's Corporation; Macy's, Inc.; Sears Holdings Corporation; Target Corporation.