CEO: Eckerd deal advances J.C. Penney expansion plan

Rachel Katz

Wednesday, April 7, 2004 | 9:03 a.m.

DALLAS -- J.C. Penney Co. Chief Executive Allen Questrom's sale of the Eckerd drugstore chain to CVS Corp. and Jean Coutu Group Inc. for $4.53 billion gives him more cash to expand his department stores, where sales rose last year for the first time in six years.

"These are two totally different businesses," Questrom said of Eckerd and J.C. Penney in a conference call. "When you have one business such as a Walgreen or CVS, you've put all your attention to that, and when you have another company, Eckerd and J.C. Penney, you're dividing your time between them, you're not going to be competitive over the long term."

Questrom, 63, took over as head of J.C. Penney in 2000, saying both Eckerd and the department stores were in need of a turnaround. While the department stores' results are improving, Eckerd's aren't. Eckerd's profit fell for the past three quarters as competitors CVS and Walgreen Co. expanded more quickly and attracted shoppers with lower prices.

Following the sale, Plano, Texas-based J.C. Penney, the No. 2 U.S. department store chain, will have $3.5 billion in after-tax proceeds. It plans to repurchase stock, retire below investment grade debt, expand department stores and open new locations. Questrom has said he wants to boost operating margins to 6 percent to 8 percent of sales by the end of next year with continued cost cuts and sales increases.

"I still have questions whether they can get up to their margin targets," said Matthew Spitznagle, an analyst at Chicago-based Northern Trust Corp., whose $478.6 billion in assets include about 4.63 million J.C. Penney shares. "A lot of the low-hanging fruit has been captured. Competition out there is pretty tough."

For Questrom, who previously led turnarounds at Barneys New York Inc. and Federated Department Stores Inc., the sale of Eckerd may be the last major deal. His contract expires next year and the board is considering who to name as a successor, he said in an interview.

"What happens with the future?" he said. "Who knows?" The company probably would look inside the company for a successor first, he said.

Vanessa Castagna, 54, chairman and chief executive of the company's stores, catalog and Internet businesses, has been mentioned by analysts and investors as a possible successor. She joined J.C. Penney in 1999 after five years as a general merchandise manager at Wal-Mart Stores Inc.

Since taking over the department store in 2000, Questrom has reduced expenses by centralizing purchasing and distribution. The effort led to keeping the same merchandise in all J.C. Penney stores, enabling the retailer to run more cost-effective national advertisements.

Under Questrom the retailer has remodeled stores to adopt features used by lower-price rival Kohl's Corp., such as centrally located cash registers, wider aisles and shopping carts. J.C. Penney, with about 1,020 stores, may have won some customers after Kohl's ordered too much merchandise last year, cluttering stores with clearance items. Kohl's has more than 540 stores.

"There's definitely more competition between the two companies," said Spitznagle of Northern Trust. "Kohl's has more growth opportunities because of the smaller store base and the room to grow the store base."

J.C. Penney reported profit from continuing operations, which excluded Eckerd's results, rose 45 percent to $253 million, or 83 cents a share in the quarter ended Jan. 31. Kohl's, based in Menomonee Falls, Wisc., said net income declined 12 percent to $246.8 million, or 72 cents, in the same period, its third straight quarterly drop.

Questrom, who earned finance and marketing degrees at Boston University, began to show his flair for fashion as a management trainee at Federated in the 1960s. He combines a knack for picking the right merchandise with business training, said Kurt Barnard, president of Upper Montclair, New Jersey-based Retail Forecasting.

"He pulled the strands together," Barnard said. "He would look at the fabric and say this fabric would go well with such and such a design. And then he would switch his mental processes to the administrative part of what it would mean to bring this fabric together with the design to the customer."

Questrom left Federated in 1988 after a hostile takeover by privately held Campeau Corp. to head Neiman Marcus Group Inc. He returned as chief executive when Federated filed for Chapter 11 in 1990 and combined the company's chains to reduce costs and increase profit. After leading the company out of bankruptcy in 1992, Questrom stepped down in 1997.

After a two-year retirement, Questrom became chief executive at Barneys, which had just exited bankruptcy. The company's losses narrowed during his time leading the company before he moved to J.C. Penney in 2000.

Questrom said he took over two turnaround businesses, Eckerd and department stores, when he became head of J.C. Penney. He set out a three-year timetable to fix Eckerd or decide whether it needed to be sold.

"We had really two turnaround companies," Questrom said. "We finally made the decision, these are two complicated businesses, there is no synergy between two of them."

J.C. Penney has said about half the company's 15 planned new stores this year will be outside malls to make them more convenient for suburban shoppers. Retailers, including larger U.S. department-store chain Sears, Roebuck & Co. also have been opening stores away from malls.

Questrom also is redesigning existing stores. J.C. Penney last month relocated and expanded a three-story store in a Queens, New York, mall by adding furniture, increasing space for handbags and accessories by 75 percent and expanding offerings of cookware and jewelry, which have seen strong sales gains.

"Penney's has a substantial amount of new, fresh capital to invest in the existing J.C. Penney business model," said New York-based Arnold Aronson of the consulting firm Kurt Salmon Associates. "The disadvantage is you have all your eggs in one basket."