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Wednesday, March 05, 2014 2:28:41 PM
Dallas Morning News (Updated: 03 March 2014 10:27PM)
http://www.dallasnews.com/business/columnists/mitchell-schnurman/20140303-with-falling-sales-and-traffic-penney-needs-to-shrink.ece?nclick_check=1
Schnurman: With falling sales and traffic, Penney needs to shrink
In this tough retailing world, how many stores does Penney need?
Customer traffic during the holidays was down sharply, and the three-year trend for malls and large retailers has been dismal. That sounds like a prescription for downsizing, especially at Penney, where sales have plunged, too.
Penney will close 33 stores by early May, after closing 10 stores last year. It plans to open just one location, next fall in Brooklyn, N.Y.
Penney last closed a lot of stores (29) in 2002, but it’s still far from the right size. After the moves, Penney will have about 1,060 department stores. That’s almost the same as in 2007, when sales were $8 billion higher.
After sales drop 40 percent, it seems logical to slash retail space. Yet the closures represent just 3 percent of Penney’s portfolio.
That’s why one analyst called it a “down payment.” Another said Penney should close several hundred stores to get more efficient.
With mall traffic fading and Penney’s problems, “we do not believe a 1,000-plus store fleet is appropriate,” wrote Paul Lejuez of Wells Fargo.
Michael Exstein of Credit Suisse said Penney’s turnaround will require store closures to boost productivity. Sales per square foot, excluding online, were running about half the rate of 2006, by his estimate.
Exstein looked at Penney closing 218 stores. Get rid of the weakest 20 percent, he wrote, and Penney productivity would rise 8.4 percent. Penney also could eliminate overlapping stores in the same area.
Any such moves would be viewed as “a step in the right direction,” Exstein wrote.
Mike Ullman, who replaced Johnson as CEO last April, has been dealing with a long to-do list. Penney had to reconnect with customers and suppliers first. Then it rebuilt departments and systems, and revived a demoralized workforce.
It took a while to complete a deep assessment of stores and settle on closing 33. About 2,000 jobs will be eliminated.
“These are the toughest decisions any leader has to make because of their impact on customers and associates,” Ullman said in an analyst call last week. “But we need to take these steps to improve our profitability.”
An analyst asked how many stores Penney would need to run the business profitably. Ullman never hinted at a figure but said that some of Penney’s smaller stores are among the most profitable.
So don’t assume a store is performing poorly, he said, because of its size or location in a small town.
“We are pretty happy with the portfolio we have now,” Ullman said.
While his team regularly evaluates stores, he said, he doesn’t expect any other “big announcements” until at least next January.
Historically, that’s when retailers reveal major cuts. Macy’s, Target and Sears have announced store closings for this year.
Sears is shutting its flagship store in downtown Chicago, not far from its headquarters. Since 2010, Sears has closed almost 250 full-line Sears and Kmart stores in the U.S.
In an online post in January, Sears CEO Eddie Lampert discussed a growing consensus: that store traffic may never return to previous levels. He cited a Wall Street Journal story that showed holiday visits to malls and large retailers had fallen by half in the last three years.
“We very often need less space … and we may need fewer locations as well,” Lampert wrote in his company blog.
While closing stores is difficult, he wrote, failing “to see where the retail industry is heading would be far, far worse.”
Penney’s options have strings attached. Breaking leases can be expensive, especially in weaker malls.
Some stores owned by Penney have been pledged as collateral.
To close 33 stores, Penney will take a hit of $43 million, including $20 million in cash. The company said it expects to save about $65 million annually.
There’s a wide range of performance among Penney stores. Exstein evaluated 68 properties whose sales were disclosed in bond offers. Sales per square foot started at $71, while half a dozen stores topped $200 a foot.
Stores with low sales can be worth keeping if operating costs are low enough. In some cases, Penney is the main game in town, so it’s positioned to rebound when the economy picks up.
But consider this: Penney and Sears have each lost about $8 billion in sales, and they’re often co-anchors in the same mall. One should have gained from the other’s trouble, unless the problem runs deeper.
That’s the theory of Howard Davidowitz, a longtime retail consultant in New York. A harsh critic of Johnson and Lampert, he doubts that Penney and Sears will both survive.
“Their customers are the middle class, and the middle class is getting crushed,” Davidowitz said.
So how small to get and how fast?
“You got to stay in business while you’re changing,” he said.
That’s the tightrope Penney is trying to walk.
Follow Mitchell Schnurman on Twitter at @mitchschnurman.
glta
scov
http://www.dallasnews.com/business/columnists/mitchell-schnurman/20140303-with-falling-sales-and-traffic-penney-needs-to-shrink.ece?nclick_check=1
Schnurman: With falling sales and traffic, Penney needs to shrink
Ron Johnson was so wrong about fixing J.C. Penney that it’s easy to forget he was right about one thing: The thrill is gone for many retail shoppers.Mitchell Schnurman
mschnurman@dallasnews.com
Published: 03 March 2014 10:25 PM
Updated: 03 March 2014 10:27 PM
In this tough retailing world, how many stores does Penney need?
Customer traffic during the holidays was down sharply, and the three-year trend for malls and large retailers has been dismal. That sounds like a prescription for downsizing, especially at Penney, where sales have plunged, too.
Penney will close 33 stores by early May, after closing 10 stores last year. It plans to open just one location, next fall in Brooklyn, N.Y.
Penney last closed a lot of stores (29) in 2002, but it’s still far from the right size. After the moves, Penney will have about 1,060 department stores. That’s almost the same as in 2007, when sales were $8 billion higher.
After sales drop 40 percent, it seems logical to slash retail space. Yet the closures represent just 3 percent of Penney’s portfolio.
That’s why one analyst called it a “down payment.” Another said Penney should close several hundred stores to get more efficient.
With mall traffic fading and Penney’s problems, “we do not believe a 1,000-plus store fleet is appropriate,” wrote Paul Lejuez of Wells Fargo.
Michael Exstein of Credit Suisse said Penney’s turnaround will require store closures to boost productivity. Sales per square foot, excluding online, were running about half the rate of 2006, by his estimate.
Exstein looked at Penney closing 218 stores. Get rid of the weakest 20 percent, he wrote, and Penney productivity would rise 8.4 percent. Penney also could eliminate overlapping stores in the same area.
Any such moves would be viewed as “a step in the right direction,” Exstein wrote.
Mike Ullman, who replaced Johnson as CEO last April, has been dealing with a long to-do list. Penney had to reconnect with customers and suppliers first. Then it rebuilt departments and systems, and revived a demoralized workforce.
It took a while to complete a deep assessment of stores and settle on closing 33. About 2,000 jobs will be eliminated.
“These are the toughest decisions any leader has to make because of their impact on customers and associates,” Ullman said in an analyst call last week. “But we need to take these steps to improve our profitability.”
An analyst asked how many stores Penney would need to run the business profitably. Ullman never hinted at a figure but said that some of Penney’s smaller stores are among the most profitable.
So don’t assume a store is performing poorly, he said, because of its size or location in a small town.
“We are pretty happy with the portfolio we have now,” Ullman said.
While his team regularly evaluates stores, he said, he doesn’t expect any other “big announcements” until at least next January.
Historically, that’s when retailers reveal major cuts. Macy’s, Target and Sears have announced store closings for this year.
Sears is shutting its flagship store in downtown Chicago, not far from its headquarters. Since 2010, Sears has closed almost 250 full-line Sears and Kmart stores in the U.S.
In an online post in January, Sears CEO Eddie Lampert discussed a growing consensus: that store traffic may never return to previous levels. He cited a Wall Street Journal story that showed holiday visits to malls and large retailers had fallen by half in the last three years.
“We very often need less space … and we may need fewer locations as well,” Lampert wrote in his company blog.
While closing stores is difficult, he wrote, failing “to see where the retail industry is heading would be far, far worse.”
Penney’s options have strings attached. Breaking leases can be expensive, especially in weaker malls.
Some stores owned by Penney have been pledged as collateral.
To close 33 stores, Penney will take a hit of $43 million, including $20 million in cash. The company said it expects to save about $65 million annually.
There’s a wide range of performance among Penney stores. Exstein evaluated 68 properties whose sales were disclosed in bond offers. Sales per square foot started at $71, while half a dozen stores topped $200 a foot.
Stores with low sales can be worth keeping if operating costs are low enough. In some cases, Penney is the main game in town, so it’s positioned to rebound when the economy picks up.
But consider this: Penney and Sears have each lost about $8 billion in sales, and they’re often co-anchors in the same mall. One should have gained from the other’s trouble, unless the problem runs deeper.
That’s the theory of Howard Davidowitz, a longtime retail consultant in New York. A harsh critic of Johnson and Lampert, he doubts that Penney and Sears will both survive.
“Their customers are the middle class, and the middle class is getting crushed,” Davidowitz said.
So how small to get and how fast?
“You got to stay in business while you’re changing,” he said.
That’s the tightrope Penney is trying to walk.
Follow Mitchell Schnurman on Twitter at @mitchschnurman.
glta
scov
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