J.C. Penney to Slash $900 Million in Expenses in Transformation Effort

Mike Kramer

Mike Kramer

PLANO, Texas–Having debuted its plans to remake its stores at a presentation in New York City on Wednesday, J.C. Penney’s Mike Kramer, chief operating officer, got to brass tacks with financial analysts in a second-day meeting yesterday.

The nuts and bolts of this enterprise will include $900 million in expense cuts over the next two years beginning on Feb. 1, when the department store’s new strategies for pricing, merchandising and marketing will also begin to take effect. Kramer told the analysts that these cuts will come primarily from stores, advertising and operations at J.C. Penney’s home office here. Ultimately, the cuts will reduce the company’s expenses to less than 30 percent of sales in that two-year time frame.

Kramer parsed the expense cuts to total $400 million from stores, $300 million from advertising and $200 million from the home office. He said J.C. Penney will strive for a “flatter organization,” with a targeted increase in average number of direct reports from four to eight.

In addition, Kramer said J.C. Penney will fund the transformation of its stores through cash from operations, beginning with $800 million in capital expenditures in the 2012 fiscal year. The majority of these funds will go to reformatting the stores by installing the company’s new in-store shops. Beginning this coming August, J.C. Penney will begin a month-by-month, shop-by-shop update of its stores, with two to three shops to be installed each month over the transformation period, which is expected to be finished by the end of 2015.

J.C. Penney is also changing the way it reports financial results. It will no longer provide quarterly sales or earnings guidance, nor will it report monthly same-store sales results.

Also during the meeting, CEO Ron Johnson spoke of J.C. Penney’s relationships with its vendors in this transformation effort. “We will radically simplify the vendor process,” Johnson said. “Our goal is to be the vendor’s best partner. They will reward us with their best idea. We will make this simpler and better so that all of the interaction will be about merchandise.”