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Penney puts unit up for sale

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J.C. Penney Co. has hired investment bankers to sell its profitable and growing direct-marketing business, and analysts estimate that it could fetch as much as $2.5 billion. J.C. Penney Direct Marketing Services Inc. will be the fourth business the retailer has sold since 1996.

James E. Oesterreicher, Penney's chairman and chief executive officer, said in a prepared statement that the company wants to refocus attention on "our core, strategic businesses - J.C. Penney department stores and catalog and Eckerd drugstores - and to unlock the unrecognized value of some of our more significant assets."

Last year, Direct Marketing contributed 26 percent of Penney's profits, and it has posted higher revenue and income in each of the last 12 years.

The division has 1,500 employees, mostly in Plano and Richardson, a spokeswoman for the retailer said. She said no staff changes are expected.

The company sells all types of insurance, including life, health, accident, supplemental hospital, credit and pet. It also has membership services, such as PlanPlus, a discount health product it developed with Eckerd. In 1999, the Plano-based division had income of $247 million on revenue of $1.12 billion.

L. Wayne Hood, retail analyst at Prudential Securities, anticipated the sale of Direct Marketing in a recent report and estimated that it could bring Penney from $2 billion to $2.5 billion if it is sold.

Penney hired investment banking firm Credit Suisse First Boston to help sell Direct Marketing; it will also consider a joint venture or other options.

Since 1996, Penney has sold its Business Services division, its MasterCard and Visa business, and its J.C. Penney credit card operations, which just went to GE Capital.

In March, Penney announced a restructuring involving closing unprofitable stores, including 40 J.C. Penney stores and 289 Eckerd stores. The company said then that it anticipated an undisclosed number of staff cuts.

Last week, 900 people found out that their jobs were being eliminated. About 25 percent are at the corporate headquarters in Plano, and the rest are from throughout the business, including Eckerd.

This year, major changes in the way Penney buys and sells merchandise were instigated and put in place by Vanessa Castagna, the chief operating officer who was brought in last year to lead a turnaround.

Any benefits from those changes aren't expected until later this year, Ms. Castagna has said.

Meanwhile, the retailer's Internet business, jcpenney.com, is growing steadily and is on track to grow to $260 million in sales, more than double last year's sales of $102 million.

Penney said it plans to use proceeds from the sale of Direct Marketing and the expected cash from its planned Eckerd tracking stock IPO to reduce debt and buy back J.C. Penney common stock. Penney has delayed the Eckerd IPO twice since it was announced in May 1999. It now plans to proceed with it in the second half. Christopher Schulz, an analyst with The Spin-Off Report, a New York-based research service, said he expects the Eckerd IPO to be delayed again.

"There is a lot of value in the company, but I don't see any momentum for a tracking stock any time soon."

Eckerd's results have lagged behind expectations as the company struggles to consolidate systems and inventory.

Mr. Hood said Eckerd would need to post at least two consecutive quarters of improving profits "before they can think about an IPO."

Penney's stock price gained $1.88 a share to close at $16.56 in heavy trading Tuesday.

The stock price is 64 percent below its year-ago level, reflecting the retailer's inability to increase sales and profits at its department stores.
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