Penney Rocked by Recession as Transition Ends : Retail: The firm’s 1,300 stores had just been remodeled, with marble, brass and more name brands reflecting the company’s upscale aspirations.

DALLAS —  When the recession hit last summer, J.C. Penney Co. was at the end of a seven-year transition that did away with such hard goods as tires and drills and substituted soft such goods as dresses and drapes.

Penney’s 1,300 stores had been remodeled, some with marble and brass, reflecting the company’s upscale aspirations. More name brands were being sold, and ads boasted of fashion coming to life.

But the recession wounded the retailer’s business. And the company’s own strategy, instead of boosting sales, drove customers away.

Sales have fallen for 12 straight months. From February to July, the first half of Penney’s fiscal year, they slipped 5.3% at established stores, those open at least a year.

“They overshot their customer,” said Dennis Van Zelfden, retail industry analyst for Rauscher Pierce Refsnes Inc. in Dallas.

“Five years ago, a normal dress may have been $50 at Penney. Now it’s more like $85, when they should have got some around $70,” he said.

Penney responded with more merchandise selling at lower prices. A basic black skirt sells for $20 today, down from $25 a year ago. But Penney, standing by its new format, continues to target its overall product mix to middle- and upper-middle-income women.

“We are changing because consumers expect us to change, but we’re not changing the strategic direction,” Chairman William R. Howell said.

“It’s not always the low price point that turns your sales performance around,” he said. “You’ve got to have the balance. To think you could suddenly focus on low value, low quality is erroneous.”

The fastest-growing retailers in recent years have been at either end of the price scale--discount stores like Wal-Mart and K mart or tony chains like AnnTaylor.

Penney has been in the middle since its beginning 89 years ago. For years it was one of the big three general merchandisers in the United States, along with Sears, Roebuck & Co. and Montgomery Ward & Co.

But in 1983, Penney stopped trying to be all things to all people, eliminating hardware, automotive, lawn and garden and electronics lines.

That left apparel and home furnishings, key items for shoppers in malls, where more than half of all Penney stores are.

“Our positioning is predetermined, based upon the profile of the business that’s being done in those malls,” Howell said.

As the company gradually converted its stores to the new format, its bottom line benefited. Income jumped from $478 million in 1986 to $802 million in 1989, Penney’s best year ever.

But earnings fell to $577 million in 1990 and may be down again this year.

In the first six months of fiscal 1991, Penney earned $111 million, a 53% decline from $237 million in 1990’s first half. Revenue was down 2.5%, to $7.44 billion from $7.64 billion.

In July, sales at established Penney stores were down 3%. Penney’s closest national rivals, Dayton Hudson Corp. and May Department Stores Co., both reported increases. Several regional competitors, such as Dillard Department Stores Inc., based in Little Rock, Ark., also posted increases.

L. Wayne Hood, a retailing analyst for Prudential Securities Inc. in New York, predicted stronger third and fourth quarters for Penney but said year-end profit will still be down from 1990.

Howell also expects a stronger second half of the year but conceded that he has not “seen any glowing light” at the end of the fiscal tunnel.

“We didn’t have as much of the right stuff as we would have hoped to have had in order to satisfy the consumer,” Howell said. “But at the same time, we didn’t anticipate--nor did the world--what would happen to the U.S. economy.”

Penney’s weakest department has been home furnishings, which bring in about 20% of store revenue and 40% of catalogue revenue. Sales of window coverings fell 10% since the recession began, and bath items were down nearly as much.