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JCPENNEY MOVES UPSCALE WITH SEPHORA AS BEAUTY BRAND

By Brannon Boswell

Department store chain J.C. Penney Corp. and French cosmetics retailer Sephora announced a joint venture to begin operating Sephora cosmetics boutiques inside JCPenney stores this fall, a move sources say will help Penney to upgrade its reputation and Sephora to expand its consumer base. This deal with glamorous Sephora “is a clear reflection of the transformation under way at JCPenney,” said CEO Myron Ullman on a conference call with investors.

The boutiques, which are to range between 1,500 and 1,800 square feet in size, will be the only beauty offering so far in JCPenney stores. They will occupy those central areas traditionally reserved for cosmetics in department store layouts. Penney exited the cosmetics business in 2003 and dedicated much of the former beauty departments to women’s accessories.

The Penney-Sephora experience will not be different from what customers encounter in a stand-alone Sephora store, including the standard array of prestige makeup, skin care, fragrance and accessories brands, said Ullman, who was an executive at French conglomerate LVMH when it purchased Sephora in 1997. He joined Penney in 2005 after helping Sephora open its first stores in the U.S.

The deal is the result of 10 months of research during which JCPenney shoppers said they expect to see more cosmetics offered in the stores. Right now some 20 million Penney customers lack access to Sephora products, Ullman said. “Our customer spends the same amount per year that the typical Sephora shopper spends,” he said. “She has the desire and the wherewithal to shop Sephora as it exists today.”

The companies say they will roll out the concept in a handful of existing stores, though they named none specifically, and also in many of the 27 stores Penney plans to open this year. Penney says it plans to have Sephora boutiques in all its stores by 2008.

The overlap of the brands is minimal, said Ullman, noting that 34 stand-alone Sephora units operate in the same malls as JCPenney stores.

The deal is not a lease arrangement, but rather a joint venture structured to be mutually beneficial, with both retailers sharing in the staffing and merchandising expenses, said Ullman.

Because cosmetics are a sales driver in department stores, the venture is likely to expand traffic and sales and enhance margins for Penney, says Deborah Weinswig, a Citigroup retail analyst. “It affirms JCPenney’s positioning as a key moderate player,” she wrote in a note to investors, “especially as Federated Department Stores divests locations and the remaining May stores are converted to the more upscale Macy’s name.”

Others cite the mutual benefits. “While Sephora brings a wide assortment, animation and exciting merchandise to the equation, J.C. Penney contributes its geographic research, real estate and customer base,” Weinswig wrote.

Sephora operates 125 U.S. stores (each occupies about 4,300 square feet) and has been opening about 25 stores in the country per year. Penney operates 1,019 U.S. stores.