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Will Launch $2.4 Billion Store Renovation and Building Offensive

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PLANO, Texas ( -- Five months after taking the helm of the once-troubled J.C. Penney chain, CEO Myron Ullman announced he will open 19 new stores and launch a $200 million remodeling of 50 existing stores this year.
J.C. Penney will spend $2.4 billion over the next five years to upgrade stores.

Speaking at a two-day meeting with analysts and investors at company headquarters here last week, Mr. Ullman said that over the next five years, a total of $2.4 billion will be spent to renovate the entire store base.

No buy out
Penney, a 1,017-store chain with $18 billion in sales but a reputation as a staid and dowdy shopping experience, was headed toward bankruptcy five years ago. Since March it has been widely rumored to be in buyout talks with private equity firms. Mr. Ullman took pains to dispel that notion and outlined an aggressive five-year plan for the total overhaul of the company's physical facilities and marketing strategies.

“The hearts and minds of the middle American customer are up for grabs,” he told the meeting.

With four of its major competitors -- Kmart and Sears Corp. and Federated Department Stores and May Department Stores -- enmeshed in mergers, Mr. Ullman said he saw an unprecedented chance to gain market share.

He defined Penney’s target as a woman aged 35 to 54 with an income between $35,000 to $85,000.

“We’ve learned through Starbucks that people are willing to pay when it is something they really want ... to trade up,” Mr. Ullman said.

'Smart pricing'
Instead of focusing on the value pricing model of competitors Kohl’s and Target, Penney’s is aiming for what he called “smart pricing,” although the term will not be marketed directly at customers.

“We shouldn’t say value pricing and low pricing, those terms are overused,” Ullman said, adding that the Penney’s brand needs to be aspirational, although the customer should be able to say “I feel intelligent about the way I made the decision.”

Some at the meeting saw the new store-opening plan to be modest growth during a time of rapid expansion by competitors, particularly Kohl’s. With few malls being built nationwide -- the traditional real estate model for the nearly 100-year-old chain -- Penney’s has begun to open off-mall sites, including 10 over the last 10 months.

“Kohl’s real estate flexibility is something to be reckoned with,” said Andy Weiner of Houston-based Weiner & Co., a shopping center developer who attended the meeting. “But Penney’s is positioned to become more competitive. With suburban growth in areas they don’t have mall penetration, they have a chance to place stores that don’t cannibalize existing stores.”

Led Macy's from 1992 to 1995
Prior to taking the helm in December 2004, Mr. Ullman headed LVMH Moet Hennessy Louis Vuitton and also led Macy’s from 1992 to 1995, in addition to a stint at competitor Federated in the '80s.

Even with his top-rate retail pedigree and intimate knowledge of the competition, Mr. Ullman faces the daunting challenge of building on the success of his predecessor, Allen Questrom, credited with turning around the company during a tenure that began in 1999 and included the shuttering of 100 stores and the sale of its Eckerd drugstore chain.

“There’s no question that this is an improving business and that there is room in the middle department store space,” said Jack Alvo, senior vice president of Dominion Bond Rating Service, a Canadian-based bond rating service in the midst of expanding its coverage of U.S.-based retailers.

Under Mr. Questrom, the results were modest, but impressive: a same-store sales increase of 5% in 2004; $2.3 billion in free cash flow generated over the last five years; and a 17% in sales per square foot, now $150.

Better emotional connection
Mr. Ullman’s vision clearly builds on Mr. Questrom’s strategy of reinvigorating the brand and has as its No. 1 strategy to make a better emotional connection with the J.C. Penney customer.

Mr. Alvo deemed the vision ambitious, but attainable.

“He is going to have to prove this over time,” he said. “My impression is that he came into a company with an established strategy and management team, so he doesn’t have to make sweeping change to either of those, which grants him a clear head start. He’s a very well-regarded player in the industry and knows how to execute.”

Like many of its peers, J.C. Penney has long relied on a promotional advertising to drive store traffic. That’s changing. Michael Boylson, chief marketing officer, reviewed the retailer’s recent effort, classifying years 2001-03 as turnaround years.

“It was almost totally promotional in nature,” Mr. Boylson said.

He defined 2004 and 2005 as transitional years when the chain began emphasizing branding spots without promotional offers and launched the Chris Madden home line.

In 2004, the chain also began marketing private brands more aggressively, an effort Mr. Boylson said will continue.

Almost 40% of Penney’s sales in 2004 were in private brands. The Home Collection, St. John’s Bay and Arizona brand each posted sales of $1 billion or more in 2004.

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