JCPenney Reports Taxing Fourth Quarter

Don Hogsett, February 26, 2007

Paying a sharply higher tax bill this year, up by more than 50% from last year when it reaped a fistful of one-time tax benefits, J.C. Penney Co. Inc. said fourth-quarter profits fell by 13.4%, to $477 million from $551 million last year.

All of the decline was accounted for by the increase in taxes, which pulled $92 million away from the bottom line. But even without the skewing effects of the tax bill, Penney earnings would have risen only modestly during the all-important Christmas quarter, up about 3.2% to $569 million.

Penney sales increased by 7.4%, to $6.7 billion from $6.2 billion last year, helped by an extra week of sales, 14 compared with 13 in last year's Christmas quarter. Without that extra week, overall sales would have climbed more slowly, the retailer said, by 4.1%, compared with the actual gain of 7.4%.

But the acid test measure of same-store sales in its department store business couldn't keep pace with last year's Christmas quarter. Measuring same-store sales on like 13-week periods, excluding the extra week, same-store sales rose by 2.2%, lagging the 2.6% growth rate of 2005.

Penney's catalog business continued to act as a drag. The retailer didn't break out dollar figures, but said that while internet sales shot up by 24.2%, overall sales in the direct-to-consumer business advanced just 4.4%, pointing to a continued decline in catalog sales.

In a prop to the bottom line, private label brands helped the retailer score a big advance in average gross margin, up 180 basis points, or 1.8 percentage points, to 38.0% from 36.2% last year. The retailer said margin growth stemmed from "continued benefits from the strong performance of private brands and ongoing improvement in inventory management, including better flow of seasonal goods."

In a further lift to the bottom line, generating cash savings, stockpiles grew at a slower pace than sales, rising by 5.9%, to $3.4 billion, compared with the 7.4% increase in sales.

But acting as a partial offset, costs climbed higher as well when measured as a percentage of sales, rising by 90 basis points, or nine-tenths of a percentage point, to 24.9% from 24.0% during last year's Christmas quarter. Penney said the higher operating costs "reflected the commitment of expense dollars to drive a successful holiday season, costs associated with the fourth quarter's extra week, and operating costs for the 28 new stores opened during the year."


Qtr. 2/3 (x000) 2006 2005 % change
a. Fourth quarter results reflect 14 weeks, compared with 13 weeks in the same period a year ago. Results include income tax expense of $271 million, up 51.4% from $179 million last year; and $20 million in after-tax income from discontinued operations, compared with $101 million last year.
b. 12-month results include $658 million in income tax expense, up 40.9% from $467 million last year; and $19 million in after-tax income from discontinued operations, compared with $111 million in 2005. 2005 results include $18 million in bond premiums and unamortized costs.
Sales $6,664,000 $6,203,000 7.4
Oper. income (EBIT) 756,000 668,000 13.2
Net income 477,000a 551,000a -13.4
Per share(diluted) 2.09 2.34 -10.7
Average gross margin 38.0% 36.2% --
SG&A expenses 24.9% 24.0% --
Twelve months
Sales $19,903,000 $18,781,000 6.0
Oper. income (EBIT) 1,922,000 1,631,000 17.8
Net income 1,153,000b 1,088,000b 6.0
Per share(diluted) 4.96 4.26 16.4
Average gross margin 39.3% 38.3% --
SG&A expenses 27.7% 27.8% --

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