By  on February 22, 2002

NEW YORK -- Investors traded down shares of J.C. Penney Co. Thursday after the firm said its 2002 profits will be below Wall Street's estimates by as much as 11 cents a share.

Results for the fourth quarter of 2001, though, came in ahead of both the firm's and the Street's expectations.

Penney's stock dropped $2.80, or 11.9 percent, to close at $20.79 on the New York Stock Exchange.

While the Plano, Tex.-based department store operator expects its operating earnings for 2002 to more than double to 85 to 95 cents a share, this estimate is still short of analysts' consensus of 96 cents. Results for the year will be dragged down by lower noncash pension income as a result of two years of declines in the equity markets. For 2002, this will reduce earnings per share by about 25 cents, five cents of which will be applied in the first quarter.

Penney's bottom line jumped into the black in the fourth quarter with net income of $95 million, or 32 cents a diluted share, including pretax charges of $16 million, or 3 cents. Operating profits came in a nickel ahead of Wall Street's expectations of 30 cents a share. The quarter's results compared to year-ago losses for continuing operations of $323 million, or $1.26, after special items of $434 million, or $1.08 a share. Revenues for the period ended Jan. 26 slid 0.3 percent to $9.54 billion from $9.57 billion a year ago.

Chairman and chief executive Allen Questrom, who signed on to turn around Penney's in Sept. 2000, declared in a statement that the firm was "on track for achieving our long-term performance goals."

Backing that up tersely on a conference call, Vanessa Castagna, president and chief operating officer for stores, proclaimed, "We're back in the game."

The core department store and catalog business saw operating profits on a LIFO (last in, first out) basis leap to $256 million from $24 million a year ago. The increase was derived from sales that declined 3.4 percent to $5.88 billion. Still, comparable-store sales rose 4 percent for the quarter. Comps for women's apparel were up in the mid-single digits while the men's wear and women's accessories categories rose 3 to 4 percent each.Questrom noted, "Merchandise assortments, visual presentation and marketing all improved from a year ago, all of which have registered with the customer." Castagna added that Penney's reduced duplication in its assortments, while last year its focus had been on reducing selling-floor clutter. Inventories, she said, were down 10 percent at the quarter's end compared to a year ago.

Philip Emma, a Moody's Investors Service fixed-income analyst, said "Penney's continues to show signs of momentum and progress at the department stores and at Eckerd [drug stores], but they still lag their peers in overall profitability. The company's sitting on a lot of cash, and we think that's important given the monumental turnaround effort that's still under way. That cash gives them flexibility.

Penney's has established three new distribution centers, each of which cover about 85 stores, and plans to roll out a total of 14 over the next two years. The moves will cost $100 million during the current fiscal year. Castagna said the new centers and accompanying system enhancements will help get "the right merchandise to the right stores in a more timely manner."

For the year, income from continuing operations came in at $114 million, or 32 cents a diluted share, against last year's losses of $568 million, or $2.29. Sales advanced .5 percent to $32 billion from $31.85 billion last year.

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