By  on November 16, 2005

NEW YORK — J.C. Penney is joining the crowd of holiday cheer.

A day after Wal-Mart Stores Inc. expressed optimism about the holiday season, Penney's leaped in with a similar view about business over the next six weeks.

On a conference call with investors, Ken Hicks, Penney's president and chief merchandising officer, characterized the company's holiday outlook as "cautiously optimistic."

He said Penney's holiday strategy is focused on offering "unique gifts at smart prices," featuring "cross-divisional" gift themes. "You will see affordable luxury gifts such as boxed jewelry sets and women's accessories, lambskin and leather jackets in men's and women's outerwear, and spa accessories in home."

Hicks predicted that gift cards will continue to be a major category this year, and that Penney's expects "gift card sales to increase at a double-digit pace this year, similar to what we experienced last year."

The executive offered the holiday outlook as Penney's reported strong results for the third quarter ended Oct. 29, although it was up against weak year-over-year comparisons.

In the three-month period, net income swelled 57 percent to $234 million, or 94 cents a diluted share, from $149 million, or 50 cents, in the same year-ago quarter. Wall Street analysts' consensus estimate had the retailer pegged to earn 92 cents. Income from continuing operations rose 58.1 percent to $234 million from $148 million.

Sales rose 2 percent to $4.48 billion from $4.39 billion, while same-store sales gained 2.5 percent on top of a 2.6 percent comps increase in the year-ago quarter.

For the nine months, net income skyrocketed 181 percent to $537 million, or $2.05 a diluted share, from $191 million, or 64 cents, last year. Sales rose 3.6 percent to $12.58 billion from $12.14 billion, while retail store comps gained 3 percent, and the direct business saw a 3.5 percent increase.

Myron "Mike" Ullman 3rd, chairman and chief executive officer, described the third quarter as a "challenging retail environment." In a statement, he said the company is entering the fourth quarter well-positioned for the holiday selling season and customers are "reacting positively" to changes the retailer is making to its merchandise and sales environment.The most recent quarter marked the 10th consecutive one of comparable-store sales increases. The strongest performances during the quarter were women's accessories and fine jewelry. Men's sportswear, men's accessories and women's dresses also contributed to the quarter's success. The company opened 18 stores in 2005, including seven in October and three in November.

At least two analysts maintained a bullish view on J.C. Penney, even as the retailer offered a conservative outlook, saying Penney's is spot-on with its merchandising and has top-notch operations. Wall Street missed those subtleties, however, sending shares of Penney's down 2.9 percent Tuesday to $52.21.

Robert Drbul, analyst at Lehman Brothers, wrote in a research note, "We continue to be impressed by the sales gain and earnings growth of J.C. Penney. Management continues to plan conservatively and has consistently delivered on its forecasts."

Bernard Sosnick, analyst at Oppenheimer, wrote in his note, "Penney's has performed well during difficult times because it is offering better quality and fashion at affordable prices, and operations with better systems."

"Our new stores as a group continue to generate sales productivity that is higher than the chain average, and the off-mall stores are a good complement to our already strong mall presence as they continue to exceed our plans," said Hicks.

He told analysts that the company posted sales increases across most areas of the country, with the best performances in the Southeast and the West. "The Southeast delivered strong results despite several hurricanes and we saw improvement in the Northeast and central regions of the country toward the end of the quarter," Hicks added.

While sales at the direct business — catalogue and Internet sales — dipped slightly in the quarter because of a decline in catalogue sales, Hicks said Internet sales have increased more than 25 percent for the quarter and year-to-date, and jcpenney.com is on track to end the year at more than $1 billion in sales.

The company guided fourth-quarter earnings from continuing operations at $1.58 a share, and full-year earnings from continuing operations at $3.51 per share.

"Looking ahead, we are focused on executing our long-range plan and believe that J.C. Penney is in a favorable position to benefit from industry consolidation. In addition, our financial condition continues to be very strong and provides the flexibility to capitalize on future opportunities," Ullman said in a statement.

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