PLANO, Tex. — J.C. Penney Co. is keeping the faith.

Despite the mood of disappointment that prevailed at the $32.3 billion retailer’s annual shareholders’ meeting Friday at company headquarters here, its executives remained confident that the 1,049-unit moderate giant will complete its five-year turnaround plan that kicked off two years ago.

Penney’s is struggling to rebound from a punishing first quarter that saw comp-store sales plunge 4.9 percent, a slump magnified by economic uncertainty and a difficult retail environment marked by tight-fisted, value-seekingshoppers.

Vanessa Castagna, executive vice president, chairman and chief executive officer of Penney’s stores, catalog and Internet, blamed the first-quarter downturn on inconsistencies in offering newness and fashion in every category and disappointing consumer response to its marketing events, among other problems.

“The past three months have represented one of the most difficult retailing environments in recent memory,” said Allen Questrom, chairman and chief executive officer.

“Although I am disappointed with the company’s execution, results for the first quarter should not detract from the significant progress we have made in improving the fundamentals of our business over the past two years. We know that we have many opportunities for further improvement, and our strong financial condition supports our business initiatives.”

Penney’s expects comp-store sales this year to inch up just 1 percent, though it didn’t rule out the chance of slightly higher gains, should the U.S. economy improve.

Penney’s stores, catalog and Internet generated $17.7 billion last year. Its department stores had comp-store sales gains of 2.5 percent, lead by home, jewelry, accessories and apparel. Weak areas included dresses, shoes and cosmetics.

In 2002, Penney’s popular Internet business saw gains of 17.8 percent while catalog sales declined 22 percent, a slide that was below expectations despite the category’s ongoing revamp.

“In summary, 2002 marked a year of good, solid progress for our department stores. Last year, our department stores moved toward full implementation of centralization. It has affected every part of the organization: merchandising, marketing and all of the operating process,” Questrom added.

“But now, as the massive structural change of going from decentralized to centralized is getting near the end, the department store team can fully focus on their five key strategic priorities: merchandise, marketing, store environment, expense control and the right people in the right jobs.”Questrom emphasized that Penney’s turnaround goals are “to sell fashionable, trend-right, high-quality apparel and soft home merchandise at great value prices to the moderate and value-conscious customer in the malls. And there’s been good progress toward that goal in every part of our department store organization. Our goal is also to capitalize on our unique and competitive advantage of being a three-channel retailer. For our customers, that means more sizes, more colors and more convenience available in any way they want to shop.”

Questrom said Penney’s $381 million Internet business remains the fastest-growing part of the company, serving more than five million unique customers a month.

Castagna said Penney’s continues to win new fashion customers with its mix of private and national brands, and that current women’s bestsellers include woven tops, activewear, accessories and fine jewelry. She said current apparel inventories are higher than plan but that the problem should be remedied by fall, in time for back-to-school.

Conversely, home inventories are leaner than a year ago, and the category remains a star at Penney’s. “Furniture has made a lot of progress,” said Castagna. “We’re focusing on really truly moderate price points and a better balance of assortments that will appeal to younger shoppers.”

Penney’s plans to launch three freestanding department stores in November that will average 78,000 square feet and feature tightly edited merchandise mixes. The stores will be in Dallas, Indianapolis and Minneapolis.

“Only six to seven new malls are being built this year in the U.S.,” said Questrom, who said though Penney’s remains a mall-based business, it will continue to explore new avenues for growth.

As reported, Penney’s also plans to roll out fashion jewelry departments to all stores by July 1 and to focus more on fine jewelry.

Penney’s 2,686-unit Eckerd Drugstores division, with $14.6 billion in sales, had comp-store sales gains of 5.2 percent last year, lead by a 7.6 percent increase in pharmacy business. Eckerd is in the midst of revitalizing stores with a fresher and more vibrant look and more competitive value-driven prices.

Besides its Penney’s and Eckerd divisions, the company operates 54 Lojas Renner better department stores in Brazil.

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