JCPenney Cuts 4Q Outlook by 25%

Home Among Weakest Categories

James Mammarella, November 26, 2007

Home furnishings powerhouse JCPenney bit the bullet in its third-quarter earnings release and took its bitter medicine with the simple statement: "Management now expects fourth-quarter earnings to be in a range of $1.65 to $1.80 per share. This compares with previous guidance of $2.41 per share."

JCPenney's third-quarter income from continuing operations of $261 million was down 8.7% from the year-ago period's $286 million. Gross margins took a 5.3% hit year-over-year, even though JCP carefully trimmed SG&A costs by 2.1%.

Quarterly net sales of $4.73 billion edged down 1.1% from $4.78 billion last year. Same-store sales fell 3.5%.

The weakest categories, the company said: children's apparel and "big-ticket home."

Analysts on the conference call peppered management with questions on the home furnishings front. One even asked if the 1,067-unit department store operator planned to retreat from the category in 2008.

A steadfast chairman and ceo Myron Ullman declared, "We are very enthusiastic about the leadership we have in the home business and our merchants are very optimistic about our ability to build back the business."

While acknowledging JCP is "not counting on [home] for a lot of growth at the moment," Ullman emphasized that shoppers consistently say JCP is "the No. 1 place for the brands they're looking for in the home" and there would be no walking away from any part of the business. (At No.2 on the HTT Top 50 Retailing Giants list, JCP had $3.065 billion in 2006 home textiles sales.)

He then observed of the competitive climate: "You may have seen Macy's had some incremental improvement in home after three years or more of very difficult business."

"It's important to point out, over the last four months we had the No.1 comp increase of all mall anchors as well as specialty stores in the middle of the mall — and we are ahead of our big-box competitors head-to-head in terms of comps," Ullman stated.

Mentioning his company's disappointment with its own September and October sales, Ullman noted the JCP comp gain 2.4% for the July-August period and its 6% comp increase in back-to-school merchandise, an indication that promotional events are key in the current retail environment.

"Our direct business has been particularly soft," Ullman added, "and has had a significant impact on our results — reflecting that it is driven about 50% by sales in home categories."

Internet sales through increased 11.8% for the quarter, the company reported, and followed a 27.0% increase last year. Total Direct sales, which include, print and outlet stores, decreased primarily as a result of declines in the print business.

Asked about the problems with "big-ticket home," Ullman said, "The decline in new home starts and decline in consumer remodels in resale homes doesn't bode well for dramatic improvements in window coverings and big-ticket furniture in the near term."

For the fourth quarter, the company projects a low-single-digit decline in its department store comps and a mid-single-digit decline in direct sales.

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