By  on December 13, 2005

NEW YORK — If consumers pull back on spending this January and retailers are forced to pull the trigger on steeper markdowns, the bottom-line impact may not be that bad.

Analysts say this is especially true for retailers such as J.C. Penney, which is using technology to better manage its inventories as well as its markdowns.

According to an analysis by WWD of department store retailers reporting results for the third quarter, the average gross margin rate was 78 basis points higher than the same period last year. Heftier gross margin rates heading into the critical holiday shopping season gives retailers more wiggle room when it comes to maintaining profits during planned promotions and markdowns.

In WWD's analysis, department store retailers serving the middle market posted the most robust year-over-year basis point changes in their gross margin rates. These included companies such as Bon-Ton Stores and J.C. Penney Co. Inc., which had gross margin gains of 365 and 110 basis points, respectively, while Gottschalks Inc. and Dillard's posted increases of 84 and 74 points, respectively. Analysts tend to applaud retailers when their gross margins rates rise 20 to 30 basis points.

Working with tighter year-over-year gross margin rates were the luxury players. Saks Inc. and Neiman Marcus had year-over-year gross margin gains of 1 and 2 basis points, respectively.

In a research note earlier this month, A.G. Edwards analyst Robert Buchanan pegged shares of J.C. Penney with a "buy" rating. The analyst praised the leadership of Mike Ullman, chief executive officer of the retailer, writing that Ullman and his team "continue to execute a common-sense strategy rooted in in-depth knowledge of the targeted moderate consumer."

Buchanan said Penney's is "catapulting the competition" by applying a "sound business process" and an "efficacious use of newly installed state-of-the-art merchandise-control software."

Jeffrey Klinefelter, equity analyst at Piper Jaffray, has an "outperform" rating on J.C. Penney. In a recent research note, the analyst is "forecasting a profitable holiday season at J.C. Penney."

"We believe J.C. Penney is positioned to benefit from continued margin improvement throughout the holiday season as the company has improved its inventory flows and its seasonal transitions. Tighter inventory control ... has resulted in lower clearance activity and gross margin expansion."

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