By  on May 18, 2005

NEW YORK — J.C. Penney more than quadrupled its first-quarter profits thanks in part to a hefty boost from its Internet business, which drove up the retailer's top line by 3.9 percent.

Earnings raced ahead of analyst expectations by 2 cents.

"It was a good quarter. We've been very pleased with our performance so far this year. It was consistent with what we articulated in our analyst meeting on April 20," said Myron Ullman 3rd, chairman and chief executive officer of J.C. Penney, in a telephone interview.

For the three months ended April 30, net income was $172 million, or 63 cents a diluted share, compared with $41 million, or 13 cents, in the same year-ago quarter. Wall Street analysts' consensus estimates called for 61 cents a diluted share. The quarterly results also included $22 million in income primarily from the sale of real estate and pretax charges of $13 million related to the repurchase of debt in open-market transactions. Income from continuing operations rose to $172 million from $118 million. Since the year-ago quarter, the company divested itself of its Eckerd drugstore business.

Sales in the quarter rose to $4.2 billion from $4 billion, while comps gained 3 percent on top of a 9.5 percent increase in last year's first quarter. By channel, total department store sales rose 3.7 percent, while catalogue-Internet sales were up 5.4 percent on top of a 6.5 percent gain a year ago. Internet sales jumped 35 percent for the quarter.

The ceo said he was proud of the company's catalogue infrastructure, which supports jcpenney.com. Although the company does not break out sales by volume of its catalogue and Internet business, Ullman said the "Internet business within the next 12 months will have a sales revenue of $1 billion."

While the company also has a sizable amount of seamless crossover between its three channels, it is also planning on improving access for both the consumer and store associates.

The retailer has begun installing new point-of-sale technology in all of its stores. Two markets are now completed and a total of 40 percent of its store base will be outfitted with the new POS systems by October, with the balance being done during 2006. The new technology enables the retailer to connect its three shopping channels through in-store access to jcpenney.com, according to Ullman."[The retailer] definitely did better than we expected. It looks like they are getting some traction from all of these new inventory systems in place. The company is fairly upbeat about the start of the second quarter, and the momentum going into the quarter. A good sign is that the business is broad-based, not sales-driven by one particular category. That's the sign of a healthy business," observed Christine Augustine, analyst at Bear, Stearns & Co.

Augustine said the strength of the management team at J.C. Penney bodes well for its future. "This is a superior team of merchants who have been working together for three or four years. What's really amazing is that every one of them is on the same page and they're all executing on the same plan. For Mike Ullman to come in and not rock the boat, and [instead] continue on as before has been very stabilizing for the company," she noted.

Ken Hicks, president and chief merchandising officer, said during a conference call to Wall Street analysts and investors that the "strongest divisional performance came from women's accessories, shoes and our home store." He noted that women's career, juniors', young men's and men's accessories also performed well in the quarter.

Hicks, in response to a query regarding markdown money, said, "We have a long-standing history of good relationships with our vendors. And we have written policies and procedures with regard to any collection of vendor allowances that are agreed upon with our vendors. And we recognize vendor allowances only when there's proper documentation supporting these. And we constantly and continually audit it both internally and externally to make sure we follow these procedures."

Robert Drbul, analyst at Lehman Brothers, wrote in a research note, "J.C. Penney has seamlessly executed a complete transformation in its department store operations and is now a pure department store retailer with a unique multichannel platform." He also noted that his firm continues to be "impressed by the sales gains and earnings growth" of the retailer.

For the second quarter, the company expects comps to increase by low-single digits with catalogue-Internet sales to increase by low- to mid-single digits. Earnings from continuing operations are expected in the range of 25 cents to 30 cents a diluted share. Full-year estimates for earnings from continuing operations are between $2.96 and $3.08 a diluted share.

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