JCP posts healthy 4Q but analysts still worry

Don Hogsett, February 25, 2002

PLANO, TX — Sailing easily past Wall Street expectations as it strengthened all of its operations, J.C. Penney put up a fourth-quarter profit of $95 million, recovering from a year-ago loss of $580 million.

Analysts and stock watchers had been forecasting earnings of 30 cents a share, and Penney easily surpassed that target, delivering a 35 cents per-share profit, beating even the company's own projections.

But Wall Street didn't like everything it heard.

The retailer's profits in the current first quarter will come in below expectations due to lowered earnings on its pension fund, thanks to a sluggish stock market.

Hampered by a broad-based recession and a steep decline in catalog sales, total company sales were virtually flat, slipping by 0.3 percent, to $9.5 billion. The bright spot for department stores and catalogs was the home business.

Department store and catalog sales declined by 3.4 percent, to $5.9 billion, more than offsetting a solid 5.0 percent increase in Eckerd drugstore sales, to $3.7 billion. But on a more positive note, same-store sales for department stores and catalogs advanced by 4.0 percent, reversing a year-before decline of 2.0 percent. Weighing down results in the core retailing business was a steep 24.8 percent decline in catalog sales in the quarter. Same-store sales at Eckerd improved by 5.7 percent, up against an 8.1 percent increase the prior year.

Driving the bottom-line improvement, the core department store and catalog operation recorded an operating profit of $256 million, a remarkable improvement over a year-ago operating loss of $68 million in the closing quarter. Eckerd drugstores made similar strides, with an operating profit of $86 million, compared with last year's slender profit of $10 million.

Fueling the earnings improvement for department stores and catalog, margins expanded substantially during the all-important Christmas quarter, widening by 530 basis points, to 30.9 percent from 25.6 percent. Gross margin dollars shot up by 18.1 percent, to $1.8 billion from $1.5 billion a year ago.

At the same time, costs held relatively steady for department stores and catalog, edging up by just 10 basis points, to 26.6 percent of sales from 26.5 percent a year ago.

For all of last year, department stores and catalog more than doubled their operating profit, which raced ahead by 115.7 percent, to $548 million from $254 million the prior year. Sales in the core retailing business slipped by 3.2 percent, to $18.2 billion from $18.8 billion. But making gains throughout all of last year, same-store sales for department stores and catalog grew by 3.3 percent, reversing a year-ago decline of 2.4 percent.

J.C. Penney Co. Inc.

Qtr. 1/26/02 (x000) 2002 2001 % CHG
(loss) Average gross margin and SG&A expenses are provided for department store and catalog operations, not for total company, including Eckerd drug stores. a-Fourth-quarter results include $48 million in acquisition amortization costs, compared with $46 million a year ago; $7 million in restructuring costs, compared with $284 million in the year-before period; and an income-tax liability of $75 million, compared with a year-before income-tax benefit of $580 million. b-12-month results include $121 million in acquisition amortization costs vs. $122 million the preceding year; $21 million in restructuring charges, compared with $488 million the year before; and an income-tax liability of $89 million, compared with a year-ago income-tax benefit of $705 million.
Sales $9,542,000 $9,573,000 -0.3
Oper. income (EBIT) 342,000 (58,000)
Net income 95,000a (580,000)a
Per share (diluted) 0.32 (1.26)
Average gross margin 30.9 25.6
SG&A expenses 26.6% 26.5%
12 months 2002 2001 % CHG
Sales 32,004,000 31,846,000 0.5
Oper. income (EBIT) 756,000 178,000 324.7
Net income 98,000b (705,000)b
Per share (diluted) 0.32 (2.29)
Average gross margin 33.6% 31.8%
SG&A expenses 30.6% 30.4%

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