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Penney pumps profits as catalog sales tumble

Sailing a steady turnaround course and overhauling operations, J.C. Penney Co. Inc. more than doubled fourth-quarter profits — up 112.6 percent — building on stronger margins, tight expense controls and sales gains in its Eckerd drugstore business.

Sales were virtually flat at $9.5 billion, as a 3.3 percent gain at Eckerd offset a drop in department store and catalog operations.

With a steep 20.7 percent drop in its catalog sales, overall department store and catalog sales slipped by 2.0 percent, to $5.8 billion from $5.9 billion last year. However, same-store department store sales improved by 1.9 percent, compared with a year-ago decline of 4.0 percent.

Eckerd sales rose 3.3 percent, to $3.8 billion. Same-store sales rose 2.5 percent.

In a big lift to the bottom line, average gross margin in the department store segment improved substantially, widening by 310 basis points, or 3.1 percentage points, to 34.0 percent of sales from 30.9 percent a year ago. At the same time toeing the line on overhead, operating costs rose only modestly, by 130 basis points, or 1.3 percentage points, to 27.9 percent of sales from 26.6 percent the preceding year. Operating profits in the department store and catalog business climbed higher by 35.2 percent, to $346 million from $256 million last year.

Pointing to improved same-store sales and margins, Allen Questrom, the architect of the Penney turnaround, commented, "The department store improvement reflects some of the early benefits of a centralized organization and improved customer service. Catalog has implemented major changes in its business model that have increased its contribution to operating profit," even as sales there continued to decline.

Offering investors some earnings guidance, Questrom said 2003 earnings will range between $1.50 and $1.70 a share, while first-quarter profits expected to be in the low 30s a share.

J.C. Penney Co. Inc.

Qtr.1/25 (x000) 2002 2001 % change
Average gross margin and SG&A expenses are stated as a percentage of department store and catalog sales, excluding the Eckerd drugstore division.
a-Total sales, including department store sales of $5.8 billion, down 2.0 percent from last year; and Eckerd drugstore sales of $3.8 billion, up 3.3 percent from 2001. 12-month sales include $17.7 billion in department store sales, down 2.5 percent from last year; and $14.6 billion in Eckerd sales, up 5.7 percent from $13.8 billion the preceding year.
b-Fourth-quarter results include $74 million in unallocated expenses, up from $23 million last year; and $17 million in acquisition amortization costs, down from $48 million. 12-month results include $93 million in unallocated expenses, compared with $46 million a year ago; and $42 million in acquisition amortization vs. $121 million last year.
Sales $9,549,000a $9,542,000a 0.1
Oper. income (EBIT) 506,000 342,000 48.0
Net income 202,000b 95,000b 112.6
Per share (diluted) 0.68 0.32 112.5
Average gross margin 34.0% 30.9%
SG&A expenses 27.9% 26.6%
12 months
Sales 32,347,000a 32,004,000a 1.1
Oper. income (EBIT) 1,107,000 756,000 46.4
Net income 405,000b 98,000b 313.3
Per share (diluted) 1.37 0.26 426.9
Average gross margin 35.9% 33.6%
SG&A expenses 32.0% 30.6%


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