Penney pumps profits as catalog sales tumble

Susan Andrews, Don Hogsett, February 24, 2003

Plano, TX — 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.

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