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JCPenney Has Hopes for Home

48% Profit Drop Closes Book on 2008

The home category was singled out as a "bright spot," helped by the demise of two category rivals, in an overall tough fourth quarter, JCPenney said during its earnings conference call last Friday.

Ken Hicks, president and chief merchandising officer, said the home business "has experienced stability over the last few months." And yet, JCP listed the home segment among its weaker categories, after fine jewelry, in the fourth quarter. Still, the mid-tier department store retailer said it had reasons to believe in future improvement.

"We're seeing a little bit of life in the home business as we move into the spring season," said Mike Ullman, chairman and ceo. "I think that may be the bottoming effect of home furnishings over the last two to three years. We may see a better trend going forward, although until the housing crisis is fixed on a macro basis it will be hard to see great increases."

Revenues of $5.76 billion for the fourth quarter ended Jan. 31 were down 9.8% from $6.39 billion in the year-ago period. For the full year, sales of $18.5 billion fell 6.9% from $19.9 billion in the prior year.

Quarterly net profit of $211 million, or 95 cents per diluted share, was down 51% from $430 million, or $1.93 EPS in the same quarter one year ago.

For the year, profit of $572 million, or $2.57 EPS, was off 48% from $1.11 billion, or $4.93 EPS last year.

Potentially aiding JCP's improvements in home are the chain's recent efforts to court former customers of the now defunct Linens 'n Things and Mervyns stores. "We are very aggressively looking at what vendors they were doing business with and what customers were relying on them as their retailer of choice," Ullman said. "We've been successful in recruiting those customers to our format. It's a little early to say what the overall impact would be, but clearly a little bit of an up-tick in trend when we were [geographically] head-to-head with those stores and they are now closed."

JCP shared proximity with about 57 former Mervyns units. But because LNT was mainly an off-mall format, "it's been more difficult" for JCP to correlate the direct impact of those closings with increased traffic and sales on like merchandise.

Hicks said JCP is aggressively going after those shoppers. "We know the products which were successful at...LNT and we put some of those products in our stores which we did not have. And we are working closely with the vendors from each of those, knowing the locations and the items and making sure we are working to pick up," he said.

JCP is "starting to see some good results from some of our larger vendors as well as some of our private brands," Hicks added. "We've stepped up our messaging in those markets and were seeing the benefit of that."

During the fourth quarter, JCP's best performing category was apparel, "where our sales trends were once again stronger than our competitors," Hicks said, particularly in women's apparel and family shoes.

Quarterly results, Hicks said, reflect lower mall traffic at holiday and weaker-than-expected January sales.

Good news from the period came via a 10.5% reduction in inventories and "tightly controlled operating expenses," which JCP said it reduced by more than $400 million.

This helped offset expense increases from the 113 new stores opened since 2006 and 17 new stores planned for 2009.

JCP was able to "effectively clear through seasonal merchandise and end the year with a clean inventory position," Hicks said.

For spring, JCP remains "pretty positive" about its apparel and sportswear assortments, and expects the lagging American Living program to continue on its recently improved path. But the retailer remains guarded.

"We see opportunities, but we also see the environment being difficult," Ullman said. "Mall traffic still continues to be down 6% to 8% a week. We're doing better than that in our mall stores and even better than that in our off-mall stores. But the customer is being very tentative. They are buying what they need and being smart about how they spend their money — it's not irrational."

J.C. Penney Company, Inc.

QTR. 1/31 (MILLIONS) 2009 2008 %CHANGE
(loss)
Sales $5,759 $6,390 (9.8)%
Oper. Income (EBIT) 389 729 (46.6)
Net income 211 430 (50.9)
Per share (diluted) 0.95 1.93 (50.8)
Average gross profit 34.6% 36.2%
SG&A expenses 25.8% 23.2%
FISCAL YEAR
Sales $18,486 $19,860 (6.9)%
Oper. Income (EBIT) 1,135 1,888 (39.9)
Net income 572 1,111 (48.5)
Per share (diluted) 2.57 4.93 (47.9)
Average gross profit 37.4% 38.6%
SG&A expenses 29.2% 27.2%


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