Exclusive: Penney shrinks top name brands to emphasize own labels

PLANO, Texas Thu Dec 12, 2013 4:47pm EST

1 of 2. JC Penney Chairman and CEO Myron Ullman speaks during the meeting of the Wall Street Journal CEO Council in Washington in this file photo from November 16, 2010.

Credit: Reuters/Jonathan Ernst/Files

PLANO, Texas (Reuters) - J.C. Penney Co Inc (JCP.N) is looking to the past to build its future.

After two years of declining sales, the department store chain is eliminating or trimming some high-profile brands introduced by former Chief Executive Officer Ron Johnson, including its own jcp menswear, Joe Fresh clothes and some Martha Stewart-designed home furnishings.

"What we now need is to edit things out that didn't resonate sufficiently," CEO Mike Ullman told Reuters in an exclusive interview at Penney headquarters in Plano, Texas.

Penney plans to use the freed-up prime floor space for its more-profitable exclusive private-label brands. The retailer has already brought back its billion-dollar St. John's Bay apparel line as well as JCP Home and Cooks, and it plans to reintroduce its Ambrielle lingerie in February.

The changes are the latest efforts by Ullman, 67, to rebuild the retailer, whose sales tumbled 25 percent after Johnson tried to make the stores more upscale and eliminated popular coupons and brands.

"He's trying to somehow rebuild a store that has an appeal to the core J.C. Penney customer," said veteran retail analyst Walter Loeb of Loeb Associates.

Ullman had led Penney between 2004 and 2011. When he returned in April, he immediately reinstated the discounts and brought back St. John's Bay to get longtime customers back in stores.

"The customer never gave up on the goods," he said. "We gave up on the customer, and we paid a price for it."

During Ullman's first stint as CEO, Penney's sales and gross profit margins reached all-time highs, and the company introduced the wildly successful Sephora cosmetics "shop-within-a-shop" that was the blueprint for Johnson's transformation plan.

But Penney's cost structure and sales per square foot lagged those of rivals, and the chain was seen by many as stagnant. In 2010, that attracted activist investor William Ackman, who pushed to replace Ullman with Apple Inc (AAPL.O) retail star Johnson the following year to transform Penney.

Johnson's strategy, which included dumping many Penney brands, cost the chain $4 billion in sales in 2012 and hurt gross profit margins. The lingering effects sent the stock to a 31-year low of $6.24 in October. Penney's stock closed up 0.8 percent to $8.55.

Last quarter, gross profit was 29.5 percent of sales, about eight percentage points below historical averages. This measure of merchandise profitability is about five percentage points higher for private brands because stores do not have to share profits with vendors and can control when items go on sale.

The renewed focus on private label merchandise is seen as crucial to reversing the sales slide before Penney can think of winning new customers, said Bernard Sosnick, an analyst with Gilford Securities.

"A retailer in need depends on shoppers who know it well to begin a recovery. Other shoppers won't come for quite a while," Sosnick said.

PRIVATE-LABEL PUSH

Increasing sales levels is the top priority, so Penney is also trying to get more out of its existing private brands by expanding them. For instance, it is looking into adding sportswear to its J. Ferrar line of men's suits.

It will launch a line of home goods, including towels and bedding, under its Liz Claiborne brand to replace the Martha Stewart-designed "jcp Everyday" items that were supposed to bear her name. That collection is at the heart of ongoing litigation brought in 2012 by Macy's Inc (M.N), which claimed exclusive rights to certain Martha Stewart home goods.

Penney continues to sell Martha Stewart products in categories like dry foods, party items and window treatments.

Starting in January, Penney will downsize the Joe Fresh shops in its stores, reduce the assortment and move the clothing brand owned by Loblaw Cos Ltd (L.TO) away from the front door to give a more prominent spot to its own a.n.a and jcp women's wear. It is eliminating jcp menswear.

The company is also reducing the assortment in top designer Michael Graves' home goods collection, whose sales Ullman said were good for some items but did not warrant all the store space it was getting.

Penney still sees potential in some of the brands Johnson brought in. It is testing ways to make the Jonathan Adler and Terance Conran home goods lines more successful, said Chief Merchant Liz Sweney. That includes selling Adler bedding with like brands, for example, since Penney shoppers prefer to browse by product category.

Still, the company is moving fast to shed merchandise that is not carrying its weight, given the urgency of getting sales back up to previous levels.

"We don't have six or seven years to get our business back," Ullman said. "Half of our business has to be brands that we can produce profitably."

(Reporting by Phil Wahba in New York; Editing by Jilian Mincer, Lisa Von Ahn and Kenneth Barry)

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Comments (9)
Overcast451 wrote:
You should ‘fill the gap’ JC Penny – do what made Wal-Mart the behemoth it is – sell ONLY American goods and pay your workers good – so they are top-notch customer service and then balance it just right…

You’d bury Wal-Mart. You have no clue how sick people are of Wal-Mart and it’s slave-sourced goods.

Dec 12, 2013 1:39pm EST  --  Report as abuse
NEWAGER wrote:
I would definitely buy more goods made in the USA if I could find them. I’m tired of supporting China.

Dec 12, 2013 2:14pm EST  --  Report as abuse
Onthemove wrote:
“The customer never gave up on the goods,” he said. “We gave up on the customer, and we paid a price for it.” On the jcp website customers are asking for so many of their standard products to be reintroduced, such as the SJB Lauren shoes. Hope that this new chapter gets back in touch with JCP customer!

Dec 12, 2013 2:49pm EST  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.