J.C. Penney’s online sales are booming. Many of its stores are in struggling malls. And sales per square foot are about one-third below levels of five years ago.
Yet despite all that, the resurgent department store’s new CEO, Marvin Ellison, is adamant that J.C. Penney won’t undertake any wholesale closings of stores in its 1,020-location fleet.
Penney has already eliminated 83 stores over the last three years to shake off some of its retail dead weight. But this year, in April, it will close only 7 seven locations, far fewer than the 36 stores Macy’s m recently closed, the 50 closings Sears Holdings has planned, or even the 18 that Kohl’s recently announced.
It’s true that Penney is on the rebound, as detailed in the current cover story of Fortune, with comparable sales up 4.5 percent last year. But the truth is, Penney operates roughly the number of stores as it did in 2006, when its annual sales, at $19.9 billion, were $7 billion higher than they were last year.
And that, frankly, is untenable unless revenue drastically improves.
Ellison says he used to also think Penney needed far fewer stores, but he’s changed his mind, and argues that Penney needs those stores more than ever as e-commerce and stores feed off of each other.
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“My intuition was very much the same until I got the data, and the data told me something very different,” Ellison said in a recent interview at a Penney store in Frisco, Texas, a short drive away from headquarters in Plano.
A big part of what the data told him is that Penney’s future hinges on stores and e-commerce interacting to spur companywide sales. By the time back-to-school rolls around, all Penney stores will be equipped to let shoppers pick up online orders the same day, helping the retailer catch up to a service Macy’s and Kohl’s already offer. Ellison last month told investors that shoppers coming in to pick up an online order typically end up spending another 35percent on that trip. And Ellison, a former supply chain guru at Home Depot hd , can now use 250 stores to fill online orders.
Still, sales per square foot last year were about $164, some 30 percent below where they were at their peak in 2006.
But Ellison’s stance is that Penney will continue to rebound enough to justify such a big store fleet.
Some 400 Penney stores are “small format” stores, typically 40,000 square feet in markets like Caribou, Maine or Williston, N.D., areas that Penney practically has to itself.
In the first few months after the taking the helm in August, Ellison traveled with his finance chief and head of real estate to visit Penney’s five lowest-volume stores in the country, in places like the Texas panhandle, Nevada and Northern California. The team found such stores carry their weight in terms of sales.
In addition, Penney owes a lot of money to creditors, having borrowed money to stay in business after a failed reinvention four years ago cost it billions in sales. The retailer’s long term debt of $4.8 billon is enormous in relation to annual sales. So any store that generates more cash than it uses is needed.
“Our four-wall profitability store by store is significantly better than most people think,” Ellison said.
What’s more, Penney has noticed that when it closes a store, online sales in the surrounding area also fall because awareness of the J.C. Penney brand falters.
Still, with one third of its 635 mall-based stores in struggling shopping centers, it seems inevitable Penney will eventually shed stores. And as Macy’s and Sears, Penney’s most common co-anchors, close stores too, many of those malls will have an even harder time.
Penney owns 425 stores outright , and it’s conceivable the company may sell some of those off to raise money as it accelerates its debt pay down.
But for now, Ellison says that while a few more closings here and there could happen, a fleet of around 1,000 stores is just about right.
“We do not have a massive number of stores we need to close,” Ellison said.
Date: March 6, 2016