J.C. Penney Is Proving It's Not Just Putting Lipstick on a Pig

This cosmetics deal shows vendors have growing confidence in the troubled retailer.

Jul 1, 2014 at 1:07PM

It's not only J.C. Penney's (NYSE:JCP) lenders who feel more confident the troubled retailer is on the road back to health. Its partners apparently feel the same way, as cosmetics seller Sephora has opened another baker's dozen worth of boutiques inside the department store chain, bringing to 489 the total number of store-in-store shops that operate today.

Recently, Penney received a vote of confidence from its lenders, who extended to it a new round of financing that stretches out the repayment terms on $2.35 billion of new debt at lower interest rates, suggesting they believe the strength the retailer exhibited last quarter with narrowing losses and same-store sales over 6% indicated better days ahead... and that they'll be repaid. 

Penney's has now opened 13 new Sephora boutiques in its stores, continuing to build on the relationship first established in 2006. Although the store-in-store concept got a bad rap at Penney's when former CEO Ron Johnson tried to expand the idea by creating similar boutiques for other brands including Levi's and Joe Fresh, believing the mini-department stores within the broader J.C. Penney environment would create a mall-like atmosphere that would keep shoppers shopping, the reality was it helped alienate customers, who apparently didn't like the modern vibe it created.

It wasn't the fault of the concept, because it's been used successfully by many other retailers. Rather, J.C. Penney customers just didn't respond to the change. Indeed, there are benefits to the in-store design that even current CEO Mike Ullman understands. After all, he was the one who first partnered with Sephora back in the day, and even as he was undoing many of the changes Johnson wrought, he announced that Disney would be opening hundreds of concession areas within Penney.

The store-in-stores become destinations in themselves and can increase foot traffic into the larger store while at the same time creating excitement around a product or brand. Best Buy has used it to great effect through a partnership with Samsung. Nordstrom saw its value and invested $16.4 million in online men's pants seller Bonobos in exchange for recreating the e-tailer's brand within its stores.

So it wasn't just Penney adopting the look and feel of boutiques that caused it to fail. It was, rather, its willy-nilly application to create a whole host of boutiques surrounding a "town square." There was also Johnson's eschewing in-house brands in favor of national brands when the store labels were still popular, and doing away with cash registers in favor of roaming associates outfitted with iPads to complete transactions so that customers did not know where to ring up their purchases. However, the store-in-store model itself didn't work as well with jeans as it did with cosmetics.

Sephora remains a popular destination for customers, one that may even help further reverse the department store chain's misfortunes. By expanding its agreement with J.C. Penney to have an even greater presence across its national footprint, Sephora is leading by example that it too believes there's still a bright future for the retailer.

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