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Penney's Puts Eckerd On The Block

J.C. Penney Inc., tired of funneling resources into its failing Eckerd drug store chain, wants to redirect those funds to its 1,048 JCPenney department stores, which are staging a comeback. According to a recent Reuters report, the Plano, Texas-based chain launched a formal auction this week with the hopes of snagging a payoff between $4 and $5 billion for its 2,710 Eckerd stores. On a recent conference call, J.C. Penney management indicated it is waiting for year's end to make a formal decision regarding Eckerd's future. Wall Street analysts are unsure as to whether the J.C. Penney Inc. board will actually go through with the sale.

"J.C. Penney is a highly motivated seller, but the poor performance of Eckerd and limited list of buyers makes the likelihood of a sale mixed," says JP Morgan analyst Shari Schwartzman Eberts. "Strategic buyers are few--given the likely multi-billion dollar price tag--and antitrust issues and heavy overlap in certain markets could make a sale of the entire company difficult. A piecemeal sale would take longer, be more disruptive and probably deliver lower proceeds."

Eckerd honchos conducted extensive consumer research back in June and have implemented changes including lower prices on front-end merchandise and more inventories to try and turn sales around. "Some benefits should have been seen in September, and were not," says Oppenheimer analyst Bernard Sosnick. In fact, Eckerd's same-store sales fell 1.1 percent, while front-line sales for the month tumbled 6.2 percent. The front-end sales spiral has been ongoing for 11 consecutive months now.

Eberts calls the announced asking price inflated, estimating that a sum of $3.5 billion is more realistic, based on a 5.2 multiple to the chain's EBITDA. Even if the sale doesn't go through, Penney's board will likely bring in a whole new management team to guide Eckerd. "The current management team aparently does not have the answers it will take to get Eckerd's same store sales back on track," Eberts adds. "Several times this year, they said to expect sales improvement and failed to deliver."

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