J.C. Penney Enjoys Turnaround

Don Hogsett, Carole Sloan, May 23, 2005

Plano, Texas — First quarter profits more than quadrupled at J.C. Penney Co. Inc. as the retailer put behind it a year-ago loss at its former Eckerd drug store business, and at the same time boosted sales, widened margins and cut its costs.

Shucking off a year-ago loss of $77 million at the subsequently sold-off Eckerd business, profits soared more than 319 percent, to $172 million from $41 million last year.

Sales climbed 3.9 percent, helped by a strong performance in Internet sales, which shot up 35 percent. Same-store sales in department stores rose 3 percent after a 9.5 percent gain in the prior-year period. Catalog and Internet sales improved 5.4 percent on top of a 6.5 percent gain in the year-ago period. The retailer said, “Improvement in sales was broad-based, with increases in all merchandise divisions and all regions of the country.”

Driving the earnings gain, in addition to stronger sales and the absence last year's Eckerd loss, the retailer strengthened margins, cut costs, whittled down interest expense and reduced merchandise stockpiles.

Average gross margin widened 120 basis points, or 1.2 percentage points, to 41.3 percent from 40.1 percent the preceding year. Measured as a percentage of rising sales, operating costs were pared 60 basis points, or six-tenths of a percentage point, to 33.8 percent from 34.4 percent, even though expenses this year included a $19 million charge tied to the expensing of employee stock options.

In another lift to the bottom line, Penney reduced its interest costs 7 percent, to $53 million from $57 million, generating a cash savings of $4 million. And even though sales increased 3 percent, the retailer managed to reduce inventories 1.3 percent, yielding a savings of $45 million.

Going forward, the retailer said same-store sales are expected to grow in the low-single digits during the second quarter. Internet and catalog sales are expected to rise in the low-to mid-single digits. Earnings per share are expected to come in at 25 to 30 cents.

Myron “Mike” Ullman III, chairman and CEO, said the performance “demonstrates that the fundamentals of our business continue to improve, driven by the positive response of the moderate customer to our merchandise, marketing and shopping experience initiatives.” He added, “Our vision is to become the preferred shopping choice for middle America, a customer segment that continues to show that it is resilient and rewards retailers that meet or exceed customers' expectations.”

J.C. Penney Co. Inc.

Qtr. 4/30 (x000) 2005 2004 % change
a. First quarter results include a $22 million gain stemming largely from the sale of real estate, compared with a year-before gain of $8 million; and a pre-tax charge of $13 million bond premium tied to the repurchase of debt.
b. SG&A expenses include a $19 million charge, about five cents per share, related to the expensing of employee stock options.
Sales $4,192,000 $4,033,000 3.9
Oper. Income (EBIT) 313,000 229,000 36.7
Net income 172,000a 41,000a 319.5
Per share (diluted) 0.63 0.13 384.6
Average gross margin 41.3% 40.1%
SG&A expenses 33.8%b 34.4%

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