By  on May 14, 2010

J.C. Penney Co. Inc.’s first-quarter profits rebounded strongly, but the company’s somewhat tepid outlook weighed on its stock, cementing what appears to be a retail theme that specialty stores and mass retailers could pick up on as more first-quarter reports arrive this week.

The first round of quarterly results also showed that costs are on the rise, but for the best of reasons. Companies are finally feeling confident enough to invest in their operations, pumping money into areas such as e-commerce. They are also paying out bonuses tied to better performance.

Sales in late April and early May were hurt by unseasonably cold weather, leading to weaker forecasts for the current quarter. The consumer recovery appears on track, though, and a Commerce Department report Friday showed that April retail and food service sales rose a seasonally adjusted 0.4 percent from March and 8.8 percent from a year earlier.

“The consumer is no longer in hiding, but they’re being very pragmatic in terms of the way they shop,” said Myron E. “Mike” Ullman 3rd, chairman and chief executive officer of Penney’s, on a conference call with analysts. “The places [where] we’ve done the best job on price points and given them merchandise, we’ve done well.”

Ullman, who is also a board member of the Federal Reserve Bank of Dallas, said the economy was still recovering from its worst downturn since the Great Depression. “For an extended period of time, it’s going to be a slow climb out of the existing economic reality,” he said.

For the first quarter, the bounce came quickly and decisively.

Penney’s profits shot up 140 percent to $60 million, or 25 cents a diluted share, from $25 million, or 11 cents, a year earlier. Earnings were in line with Wall Street projections, and sales for the three months ended May 1 inched up 1.2 percent to $3.93 billion from $3.88 billion on a 1.3 percent rise in comparable-store sales. The retailer’s strongest performance came in the men’s business, where Joe by Joseph Abboud and Irreverent are recent additions.

But Penney’s outlook for the current quarter opened up some downside to current analyst estimates and echoed the cautious tone struck by other retailers, including key competitor Kohl’s Corp. Penney’s projected second-quarter earnings of 10 cents to 13 cents a share, while analysts were planning for 13 cents.

Penney’s stock fell by 2.2 percent Friday to $27.54.

Shares of Dillard Inc. swung the other way, rising 7.9 percent to $27.76 after the company reported a sixfold increase in profits. The department store’s net income increased to $48.8 million, or 68 cents a share, from $7.7 million, or 10 cents, a year ago. Sales for the three months ended May 1 slipped 1.4 percent to $1.45 billion from $1.47 billion.

Nordstrom Inc.’s stock fell 3.7 percent to $39.76 after the company posted a 43.2 percent rise in first-quarter profit, but disappointed Wall Street with its outlook late Thursday. Kohl’s Corp. reported a 45.3 percent jump in income for the quarter and Macy’s Inc. flipped to a profit from a loss a year earlier.

“The theme has really been strong sales and strong gross margins, but higher costs,” said Erika Maschmeyer, an analyst at Robert W. Baird & Co. “A lot of the news on higher costs is really good news, it’s higher incentive compensation on better-than-expected sales.”

For Penney’s, Maschmeyer said the second half would hinge on the introduction of Liz Claiborne under exclusive license and MNG by Mango. “Liz Claiborne really is a home run,” she said. “It’s not a made-up brand like American Living. There are customers who buy it who aren’t current Penney’s shoppers and it’s up to Penney’s to convert them.”

Ullman said American Living, which is produced by Polo Ralph Lauren Corp.’s Global Brand Concepts unit, continued to perform well and is “accretive to our performance.”

Polo is just one of the laundry list of companies reporting quarterly results this week. The market also will get fresh readings on Wal-Mart Stores Inc., Target Corp., Saks Inc., Abercrombie & Fitch Co., Gap Inc. and AnnTaylor Stores Corp., among others.

Christine Chen, an analyst covering specialty retailers at Needham & Co., said the trends established last week would continue. “I think you’ll continue to see a very solid first quarter — top-line beats, bottom-line beats driven by real sales growth and more full-price selling,” Chen said. “It’s baby steps, but I do think the consumer feels better.”

Besides, Chen said it wouldn’t help anyone if projections from retailers prompted investors to get too aggressive. “I don’t think it’s necessarily an indication that we’re taking a step back,” she said. “It’s just appropriately cautious.”

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