5 Burning Questions for J.C. Penney's CEO

NEW YORK ( TheStreet) -- J.C. Penney ( JCP) is the turnaround story in the department store sector.

While the company lagged rivals Macy's ( M) and Kohl's ( KSS) throughout most of 2010, its exclusive brands and merchandising initiatives have put it on track to regain market share.
J.C. Penney's CEO Myron Ullman

J.C. Penney has benefited from its exclusive partnerships with Liz Claiborne ( LIZ), MNG by Mango and Call It Spring from Aldo, as well as the roll out of Sephora shops within stores.

The company began seeing these benefits in the fourth quarter, when profit rose 35% to $271 million, or $1.09 a share, on revenue of $5.7 billion, a 2.8% increase from the year prior.

J.C. Penney also touts major investors like William Ackman and Steven Roth on the board of directors.

And at the helm is retail veteran Myron (Mike) Ullman III, who has navigated J.C. Penney amid the recession.

But regardless of its recent ability to get it right, investors are still skeptical over managements 2011 forecast. The company is calling for a profit between $2 and $2.10 for the year, ahead of Wall Street's estimates of $2.04 a share.

Of course, like all retailers, the company faces several potential headwinds. Ullman discussed with TheStreet how pressures like sourcing costs and higher gasoline prices will weigh on the company, and just how far we are in the retail recovery.

TheStreet: Where are we in the retail recovery?

Ullman: "It started in the middle of the fall where we noticed customers start to buy things for home entertaining. Thanksgiving weekend we were selling table linens and Pyrex -- things that weren't deemed essential nor are they necessarily gift-able items. This showed a somewhat different attitude about the holiday period."

"We also noticed more self-gifting. During the recession people were laser-focused on making sure they got their gift-lists accomplished, but didn't spend so much time thinking about things for themselves. All through the holiday period we saw a more enthusiastic response from the customer.

"Having said that, they were still being very cautious in terms of making sure the price was right and it was something they really liked. A good example of that would be our business with Sephora, which was the best in our store. Sephora is not a price-promoted concept. It's really about innovation and excitement. Even during their price-conscious moments, shoppers still had time for something that was a little more aspirational. But when it came to buying a basic or something that was more of a commodity, they didn't want to pay a penny more than they thought they should.

"I think it plays well to our strengths. At our price points we are significantly below the higher-priced department stores. We are really the lowest-priced anchor in the mall. We like the fact that the customer is taking the time out to figure that out.

"We had a good February. That was encouraging. We were up 6.4% on a comparable-store basis. That included the pretty difficult weather everyone felt in the first week. We had a very successful Valentine's Day, which is a key selling period for things like Sephora or fine jewelry, so that's consistent with what we saw during the Christmas season.

"I will say that on a week-to-week basis when nothing is going on, mall traffic tends to trail off, so it does show the customer continues to be discerning of how they spend their time and money. We feel like we have to earn it. Fortunately for us, we have a lot of new attractions that are differentiated and only at Penney's, like Liz Claiborne, MNG by Mango, Call It Spring and Sephora."

TheStreet: How will sourcing costs affect J.C. Penney in 2011?

Ullman: "Apparel has been a deflationary category for almost 20 years. The commodity price increases, particularly in cotton, are weighing on all retailers in apparel. Those headwinds need to be offset by running your business better in some other way. We are trying to shield the cost increases from the customer as much as possible. We think we can do that because we have a big private brand program, so we can work directly with the mills and suppliers. But we are not immune.

"Due to our extensive private-label brand portfolio, we are able to work directly with the suppliers in Asia. This gives us the advantage of buying the good upfront. We also have a better understanding of how to place the production to get the best costs, and we get the benefit of the manufacturers' expertise on techniques and technology they've discovered to get the product with the same high quality and styling but at lower cost. If you are looking to a middle man you are sentenced to whatever decisions they make about the way the sourcing is accomplished. Having been out there for 50 years is working to our benefit. We have been able to move production around in different countries to take advantage of the efficiencies and effectiveness that vary by country."

"The sharpest price points need to be protected so the value-driven consumer can find what they are looking for at a price they can afford. At the same time, on more of the aspirational product, the customer is willing to pay a bit more. By mixing the two we can maintain our margins with a minimal number of price increases.

"Still, there will clearly be price increases in the second half of the year, but they won't be across the board. We have been testing re-engineering price points and promotions for almost nine months in different categories in different ways, so we have some confidence in what the customer is willing to accept and what they are resisting. Of course, the way they express resistance is they don't buy it. So the number of units go down and you don't get as much revenue. So far I think we are a little bit ahead of our peers because we got started early in testing because of our private brand."

TheStreet: How will gas prices play a part in consumer spending?

Ullman: "I just came from a Federal Reserve board meeting and that was pretty much the topic of the day: At what point does the consumer find fuel and gas prices start to change their behavior? I think there is a point where someone says, 'wait a minute at $4 a gallon I better change the way I behave.' They might get a different car or refrain from driving as much on a leisure basis.

"Gas prices have gone up rapidly over the past three to six weeks, but so far I don't think that has been weighing on our customer specifically, but if it persists we have to be realistic about it. A family has a budget, and fuel is one of the things that's not discretionary. Fuel is used to get to work or take kids to school. We are mindful of it. So far it is somewhat of an unknown. At current levels, we don't see it as a major drag on sentiment or spending."

TheStreet: How does J.C. Penney plan to grow in 2011?

Ullman: "We are definitely going to continue to roll out Liz Claiborne across the store. It is currently in 30 different merchandise categories in men's, women's, accessories and home. It has been very, very successful. I think it gives the customer terrific style, quality and at even somewhat cheaper prices than they found in other stores in the past. I think the design team has done a fabulous job of pulling it together and it is trending way over our plan.

"The continued roll out of Sephora inside J.C. Penney is a key priority. We will add 75 or 76 stores this year. It will be over 300 by the end of the year on the way to 600. The Call It Spring by Aldo is a more updated contemporary shoe statement that we will have in about 550 stores by the end of the year. That was just launched in 100 stores, so we are off to a fast start there."

"I am sure you are familiar with H&M, Zara, Forever21 and Uniqlo; the true fast-fashion retailers. We think it is a coup to have Mango in our stores and to give our department store customer a chance to see what is out there across the world in a very fast-cycle basis at very affordable prices. People are familiar with Mango from South America or Europe, but they see it in our store at very compelling prices. We think that is a way to attract new customers to J.C. Penney, but also gives existing customers a reason to come to our stores more often because of the frequency of the deliveries."

TheStreet: Are you hiring in 2011?

Ullman: "We do hire regularly. Every new initiative for the stores, we would be hiring for that. Every new Sephora probably ends up with 20% new staff members that are extensively trained to serve customers in the Sephora setting and technology. We also do a lot of holiday hiring. Our core commitment is to have people who are well trained and not have a lot of turnover. We are proud that our turnover is less than our key competitors.

So while we are hiring, we hope to be hiring less on the basis that people stay with us and they learn to take care of our customers and our products. Our turnover has come down dramatically over the last five years.... We are opening new stores, we are remodeling stores, opening new concepts, so clearly our workforce will grow this year."

Have questions or comments about retail stocks? Drop an e-mail or Tweet http://twitter.com/jpoggi.

--Written by Jeanine Poggi in New York.

>To contact the writer of this article, click here: Jeanine Poggi.

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