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Why won’t J.C. Penney close more stores? E-commerce, the next CEO says

Earns JC PenneyEarns JC Penney
The J.C. Penney comeback continues.Photograph by LM Otero — AP

J.C. Penney (JCP) is on the comeback trail — slowly.

Despite still having a huge fleet of stores in relation to its still-low sales levels, the retailer is not planning a big store purge.

The department store company outpaced Kohl’s (KSS), Macy’s (M) and many other rival retailers in the first quarter, reporting comparable sales rose 3.4% and building on the progress it made in 2014 rebuilding a business decimated by a failed experiment with promotion-free retailing and trendier merchandise in 2012 and 2013 under former CEO Ron Johnson. That experiment sent millions of customers away permanently.

Indeed, for all the improvement that came from reviving popular in-house brands such as St. John’s Bay and fixing the retailer’s e-commerce, annual sales last year only ticked up to $12.3 billion, still nearly 30% below pre-Johnson levels. And the company itself only anticipates sales will rise to $14.5 billion in 2017, still a long way away from the $20 billion level seen nearly a decade ago.

Sales per square foot of selling space in 2014 came to $155, down from $210 only four years earlier, giving plenty of ammunition to anyone who argues that Penney has too many stores to support its current sales levels. To be sure, Penney closed 40 stores earlier this year, and 33 last year. That still leaves the company with some 1,020 locations.

So it’s fair to ask: why hasn’t J.C. Penney closed an even bigger chunk of its store fleet?

Marvin Ellison — the former Home Depot (HD) executive and current Penney president slated to take over as CEO in August — told analysts that many stores allow Penney to serve customers in locations where it is the only game in town. What’s more, stores are a crucial component to building up its e-commerce business, given how much retailers in general are integrating physical stores and their digital operations to keep up with how consumers now shop.

About 700 Penney stores are based in malls, and of the other 300, many are in smaller communities like Caribou, Ma., and Williston, N.D. In such markets, Penney serves as a “gathering point.” What’s more, off-mall stores have tended to enjoy healthier shopper traffic trends than those in malls.

“We hear a lot that we should consider closing more stores, especially stores in rural areas,” Ellison told Wall Street analysts at a Piper Jaffray conference. “There’s a misperception that those stores are our least profitable, whereas, in most cases, those stores are our most profitable.”

It’s not that Penney is ruling out store closings at some point. It’s just that it’s too early to decide how big a fleet it needs considering how much retailing is changing.

Penney was once an e-commerce powerhouse. Eight years ago, jcp.com was generating $1.5 billion a year, or three times more than Macy’s, thanks to its legacy as a catalog operator. Despite making strides in the last year, it is now still well behind Macy’s, and to a lesser extent Kohl’s, in its ability to use stores as supplemental distribution facilities. That helps speed up delivery of on-line orders and reduces how much inventory gets sold at clearance, an integration known in the biz as “omni-channel retailing.”

This is no small matter. Penney customers who shop both in stores and online spend 2.5 times more than the average.

So the company has been prepping a lot more stores to help it with e-commerce, whether it be to accept returns from jcp.com (the vast majority of those returns are made in store, leading to more store traffic, and ergo, more opportunities to sell), or planning for customers to be able by 2016 to place an order online and have it delivered to the store of their choice the same day.

Therefore, closing stores prematurely could cost it a ton of business.

“Until we can get this omni-channel fully rolled out, we have to guard against making the assumption that we have a correct or incorrect number of stores,” Ellison said.