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Penney, Sephora Make Up Venture

In April, J.C. Penney said it agreed to open up the prestigious, European cosmetic chain, Sephora, as stores-within-stores, first at new Penney locations with a subsequent rollout at many existing stores. The move adds a strong brand to Penney while giving it a foothold in the high-profit cosmetics business and helping broaden its customer base.

“Our customer spends approximately the same amount each year as the typical Sephora customer,” said JC Penney CEO Mike Ullman in a conference call with investors “She has the desire and the wherewithal to shop Sephora as it exists today.”

The deal represents a new strategy for Penney. It primarily employs proprietary brands for apparel, but this brings an established brand into its stores. Sephora carries its own line in addition to other cosmetics and has built an identity with its glitzy locations. Penney's move emulates the strategy employed by Federated Stores Inc., which one week earlier signed a deal to bring Martha Stewart products to Macy's. It is also in stark contrast with Sears Holding Corp., which appears to be letting Stewart walk away from its relationship with Kmart after their contract ends.

Ullman, who used to head LVMH Moet Hennessy Louis Vuitton, which owns Sephora, helped grease the wheels for the deal. Sephora will open stores ranging from 1,500 square feet to 1,800 square feet that will carry a more limited selection than its standalone locations.

The rollout will be gradual. New stores will come on line starting in September 2006. All new Penney's stores in 2007, about 30, will feature Sephora stores. In late 2007 and 2008, Penney will begin retrofitting older stores and add Sephora locations at a total of 1,000 stores. Visually, the stores will carry the glam look as Sephora's stand-alone locations.

Penny will carve away from the center cores of existing stores, primarily the accessory sections. “You will look through Sephora into the fine jewelry section as you walk through the door,” Ullman said.

Penney analysts lauded the deal.

“Unlike Penney's unsuccessful prior effort to launch cosmetics lines, Sephora has an aura of authenticity,” says Oppenheimer analyst Bernard Sosnick

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