NEW YORK — The union of J.C. Penney and Sephora was met with mixed reviews Tuesday. Retail analysts lauded Penney’s plans to outfit its stores with Sephora boutiques, but some industry watchers cautioned that Sephora’s move “downstream” could threaten the positioning of its existing 125 doors and the prestige brands housed inside.
Still, proponents said Sephora, an LVMH property, fits neatly into Penney’s strategy to modernize its approach and court new customers.
“I think this is a great deal for J.C. Penney, which has been trying to awaken customers to the fact that it’s going through a transformation,” said Michelle Clark of Morgan Stanley. She cautioned that the department store will need to ensure that Sephora price points resonate with Penney’s customers. “In the late Nineties, J.C. Penney alienated itself from its core customers by taking its pricing upscale and it lost market share.”
During a call with analysts Wednesday evening, Penney’s chairman and chief executive officer, Myron Ullman 3rd, said the retailer’s customer base is already buying prestige beauty brands sold in Sephora doors. “We see no reason to modify the range of price points,” declared Ullman, a former LVMH executive credited with bringing Sephora stores to the U.S. market. He would not comment on which beauty brands will be included in the 1,500- to 1,800-square-foot Sephora concept, except to say that Sephora’s top 15 brands are “100 percent behind the venture.” Analysts interpreted that to mean brands in the Estée Lauder Cos. portfolio.
Linda Bolton Weiser of Oppenheimer & Co. commented that Lauder could miss an significant opportunity, should the company decide not to move into Penney’s Sephora boutique. “This deal could help break the golden handcuffs relationship that Lauder has with department stores,” said Weiser.
The benefits of the relationship may be clear for Penney’s, but some analysts wondered whether Sephora was risking its prestige standing in the U.S. by aligning with a mid-tier department store. Several industry sources speculated that Sephora may be responding to pressure to maintain LVMH’s aggressive double-digit growth targets.
One Paris analyst who tracks LVMH said that despite the retailer’s growing pains in the late Nineties, Sephora’s U.S. business has achieved double-digit comparable-store growth over the last five years. “Clearly, this move is not intended as a solution to a problem,” said the analyst. “Sephora is going after size in the U.S. market. It is trying to rapidly occupy a new territory before a competitor does.”
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Penney’s plans to roll out the Sephora concept to a handful of its 1,019 stores this year and to new doors in 2007. The retailer said it will ramp up the effort the following year.
Analysts squelched comparisons to Penney’s previous, unsuccessful beauty strategy with Avon’s retail brand BeComing. “The Avon test was of a brand that never existed before, and was far more limited than what Sephora might be able to achieve,” said Bernard Sosnick of Oppenheimer & Co.
Some industry experts contended that the Sephora store-within-a-store concept — stocked with established brands — is preferable to Lauder’s proprietary branded strategy for Kohl’s. In that program, Lauder produces four brands — Flirt, Good Skin, American Beauty and Grassroots — exclusively for Kohl’s.
“Sephora offers a comprehensive brand lineup, in contrast to what Kohl’s is doing with Lauder’s four brands,” said Robert Buchanan of A.G. Edwards & Sons Inc. For beauty to work in Penney’s, Buchanan said, “J.C. Penney needs to set the floor with marquee brands.”
Wendy Liebmann, president of WSL Strategic Retail, said Sephora’s mix and price points are diverse enough to work in Penney’s. She commented, “These are the kinds of bold moves that beauty needs.”
Penney’s stock closed down 0.6 percent to $58.14 Wednesday.