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Penney’s, Dillard’s Return to Black

Penney's and Dillard’s Inc. reported second-quarter results Friday.

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J.C. Penney Co. Inc. has been criticized for ceding market share to the likes of Macy’s and Kohl’s, but Myron E. “Mike” Ullman 3rd, chairman and chief executive officer, seems to have his eye on some stiffer competition — fast-fashion retailers.

The often-mentioned fast-fashion retailers in the U.S. are Zara, Uniqlo, Forever 21, H&M and Mango.

“If department store executives were candid, they would tell you that probably $20 to $30 billion of volume has come out of department stores by the five [fast-fashion] retailers ramping up a very successful business model,” Ullman told Wall Street analysts on a conference call Friday following the firm’s release of second-quarter earnings.

Over the past decade, H&M, for one, has expanded from a single outpost in Midtown Manhattan to 198 doors across the country, each offering plenty of fashion pop for the buck and exclusives from top-shelf designers such as Karl Lagerfeld and Stella McCartney.

Penney’s is now taking the “if you can’t beat them, join them” approach. This week, the retailer will open 77 MNG by Mango shops in its stores and plans to have 600 outposts, each comprising about 1,500 square feet, by the end of fall 2011.

“All retailers are losing share to fast fashion — that’s changing the whole dynamic,” said David Bassuk, managing director at AlixPartners’ retail practice, who has helped chains craft quick-turn strategies. “With all the risk in the economy, the whole concept of speed to market is one of the things that will differentiate the winners from the losers.”

Bassuk said retailers across channels and price points are reacting to fast fashion, revamping private label programs to get merchandise into stores more rapidly. “It is absolutely at the forefront of what people are thinking about,” he said. “We’re in the infancy of what it’s really going to become.”

Penney’s, which has 1,107 doors, also is hitting on the other big retail trend — exclusive offerings — and is rolling out its new take on Liz Claiborne. Next month the chain will start opening up shop-in-shops for The Aldo Group’s Call It Spring brand.

Penney’s is looking for comparable-store sales to rise by 2 to 3 percent in the third quarter, compared with a 4.6 percent decline a year earlier, and Ullman said “virtually” all of the gain would be driven by the chain’s new offerings.

The company set its third-quarter earnings at 16 cents to 20 cents a share, less than the 24 cents Wall Street anticipated.

For the three months ended July 31, net income totaled $14 million, or 6 cents a diluted share, compared with a loss of $1 million, or zero cents, a year earlier. Sales were essentially flat at $3.94 billion, while comparable-store sales inched up just 0.9 percent.

For the six months, Penney’s posted income of $74 million, or 31 cents a diluted share, on sales of $7.87 billion.

Shares of Penney’s fell 4.7 percent on Friday to close at $19.82 in trading on the New York Stock Exchange.

Dillard’s Inc. also reported second-quarter earnings Friday, posting net income of $6.8 million, or 10 cents a diluted share, against a year-ago loss of $26.7 million, or 36 cents. Total sales for the quarter ended July 31 fell 2.7 percent to $1.39 billion from $1.43 billion. Comps were flat for the three months.

The company said it had made inventory management adjustments to ensure a “more continuous flow of fresh merchandise throughout the season.”

Dillard’s stock sank 5.1 percent to close at $19.85 in Big Board trading Friday.

Results from both retailers are following the second-quarter theme so far, which shows slower growth than many initially hoped for amid a wicked battle for market share. Wal-Mart Stores Inc., Saks Inc., Target Corp., Gap Inc., AnnTaylor Stores Corp. and others report quarterly results this week.

The S&P Retail Index slipped for the fourth straight day Friday, dropping 1.4 percent, or 5.75 points, to 399.98, the first close below 400 since July 21.

Of the 172 issues tracked by WWD, 148 fell last week, while six remained flat and 18 gained ground.

Retail stocks lost 3.5 percent for the week, more than the Dow Jones Industrial Average, which fell 3.3 percent. Stocks declined at major markets around the world last week, with the Nikkei 225 in Tokyo, the CAC 40 in Paris, the Hang Seng Index in Hong Kong and the DAX in Frankfurt all falling more than 2 percent.

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