J.C. Penney's New Brooklyn Store Is an Interesting Move

J.C. Penney (NYSE:JCP) has spent most of the past two years in defense mode. Comp sales growth has slowed to a crawl, and a combination of competitive pressures and inventory management missteps has pressured profitability despite the company's deep cost cuts.

In response to these headwinds, J.C. Penney closed about 140 stores last year, and has shuttered about 200 stores since the beginning of 2015. Nevertheless, the company plans to open at least one new store this year. Last week, J.C. Penney announced that it will open its second location in Brooklyn on Aug. 10 at the Kings Plaza Shopping Center. This store may enable the company to test new retail concepts that could help power a broader recovery.

A new store is set to open

Kings Plaza is the largest mall in Brooklyn. For many years, it was anchored by Macy's and Sears Holdings (NASDAQ: SHLD). However, in 2016, the Sears store fell victim to one of that chain's many rounds of downsizing.

Over the past two years, mall owner Macerich has been redeveloping the massive Sears store for a handful of somewhat smaller tenants. J.C. Penney will join Primark, Zara, and Burlington Stores as one of four major tenants replacing Sears.

J.C. Penney will be one of the new anchors of Kings Plaza in Brooklyn. Image source: J.C. Penney.

The Kings Plaza store opening will come nearly four years after J.C. Penney first entered the borough with a store at Brooklyn's Gateway Center. The Gateway Center store has been one of the chain's top performers since it opened, according to management. Thus, it's no surprise that J.C. Penney was eager to open another Brooklyn location, particularly because Kings Plaza is somewhat more accessible to public transit than the Gateway Center.

Making the most of a smaller space

One slightly unusual thing about the Kings Plaza store is its size: 75,000 square feet. That is significantly smaller than the company average of about 110,000 square feet. Many J.C. Penney stores are even larger than that. For example, the Gateway Center location has 124,000 square feet of space.

Despite the new location's small footprint, it will have room for two of the company's signature sales-driving attractions. First, there will be a 2,000-square-foot Sephora boutique in the center of the store, building on J.C. Penney's incredibly successful partnership with the beauty specialty retailer. Second, the store will feature a small-format appliance department.

J.C. Penney's management has indicated that Sephora and appliances are critical for boosting sales per square foot. Many of the J.C. Penney stores that closed last year were targeted because they were too small to support Sephora shops and appliance departments.

By contrast, it seems inevitable that J.C. Penney will devote a lot less space to apparel in its Kings Plaza store. This makes sense, given that J.C. Penney's apparel departments have been struggling with sales declines in recent years.

A learning opportunity

J.C. Penney currently has appliance showrooms in about 600 of its more than 860 stores. The company has a chance to gain market share in appliances over the next couple of years as Sears is closing full-line stores faster than ever. However, to capture the full sales opportunity, J.C. Penney would need to put appliance departments in even more of its stores: ideally all of them.

The main constraint is space. J.C. Penney has been working to create a viable small-format appliance showroom that it could install in smaller stores. The Kings Plaza location will test that concept and should provide insights on whether it makes sense to add appliances to some of J.C. Penney's other smaller stores. The company may also discover that its apparel departments can become more productive with less space and a more curated assortment.

If the new store is successful, it could also pave the way for further store openings in urban markets where 100,000-plus-square-foot spaces are hard to come by. Thus, J.C. Penney has a lot riding on its Kings Plaza store opening next month.