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The Questrom Magic: J.C. Penney Reports 297% Leap in Profits

NEW YORK — Focused on centralization, J.C. Penney Co.’s turnaround accelerated in the third quarter as the retailer quadrupled its profits.<br><br>Investors were delighted by the stronger-than-expected results, which were helped somewhat...

NEW YORK — Focused on centralization, J.C. Penney Co.’s turnaround accelerated in the third quarter as the retailer quadrupled its profits.

Investors were delighted by the stronger-than-expected results, which were helped somewhat by special items, and traded up shares of the firm a whopping $2.45, or 13.2 percent, to close Tuesday at $20.96 on the New York Stock Exchange.

Net income jumped 296.8 percent to $123 million, or 42 cents a diluted share, for the period ended Oct. 26. This compared with year-ago profits of $31 million, or 9 cents.

Excluding a $34 million aftertax gain in the most recent quarter related to last year’s sale of the Direct Marketing Services unit, earnings still shot up 187.1 percent to $89 million, or 30 cents a diluted share. Additionally, the quarter just passed also included a $4 million pretax charge, while the year-ago period saw $17 million in pretax special items, including restructuring charges.

Wall Street, which was warmed up for the third-quarter showing on Oct. 28 when Penney’s said its operating profits would exceed 21 cents a share, was looking for earnings per share of 27 cents, 3 cents shy of the actual result.

Sales for the 13 weeks, including the firm’s Eckerd drugstore business, inched up 1.9 percent to $7.87 billion from $7.73 billion a year ago.

“In department stores, our sales momentum demonstrates that the changes in merchandise assortments, marketing and store presentation under the centralization model are registering with the customer,” said Allen Questrom, chairman and chief executive officer, in a statement. Penney’s is in the second year of its five-year turnaround, spearheaded by the ceo.

Operating profits for department store and direct business, on a last-in, first-out basis, improved 14.9 percent to $170 million from $148 million a year ago. Sales at the division dipped 1.1 percent to $4.31 billion from $4.36 billion in the year-ago quarter. Comparable-store sales, however, were up 3.9 percent. Inventories, on a comp basis, were up about 1 percent at the end of the quarter.

While the firm’s Internet operations continue to perform well, with sales more than 20 percent ahead, catalog sales decreased 21.2 percent in the quarter, primarily from lower circulation and page counts. The catalog business has recently been in flux but is expected to level by the end of next year.

This story first appeared in the November 13, 2002 issue of WWD.  Subscribe Today.

Vanessa Castagna, executive vice president, chairman and ceo of J.C. Penney stores, catalog and Internet, added on a conference call that the firm’s adjustments “are all focused on improving the value equation for our customer. Malls continue to be an important part of the customer’s shopping pattern and we are intent on being the fashion, value destination in the mall.”

Penney’s quarter was defined by a robust back-to-school season, when other retailers had difficulty getting started, and a 13.7 percent department store comp uptick in October. The strongest categories in apparel were men’s sportswear and tailored clothing, misses’ casual sportswear, juniors, boys’, sleepwear and fashion jewelry.

Sales strength was also helped by what Castagna described as “an aggressive marketing program” designed to create impact, clarity and a sense of urgency with the customer, backed up by more trend-right merchandise.

Much of the store’s success as of late goes to its move toward a centralized structure, she said. “We are able to achieve efficiencies that were not possible before,” said Castagna. This helped Penney’s focus on trend-right assortments, larger order quantities, a more timely selection, delivery of merchandise to stores based on sales trends and in-store presentation.

However, Castagna cautioned: “We still have a long way to go, including distribution and the flow of merchandise to our stores.” On Monday, the company’s eighth store-support center opened in Milwaukee. The centers currently cover 65 percent of the firm’s 1,061 stores. By early 2003, the firm will have opened five more centers for a total of 13.

Salomon Smith Barney analyst Deborah Weinswig said: “Everything they’ve been laying the foundation for is starting to show up.” In addition to better in-stock levels, central checkouts and a more consistent presentation across the chain, she said: “They have a great product, it’s trend right.”

Penney’s is also differentiated in the mall by its 40 percent penetration in private label merchandise, she noted.

“The mall’s not dead, because Penney’s is doing fantastic,” Weinswig noted. “They’ve won over the consumer. They’ve always been a value-orientated retailer. Everybody always thought of them that way, but now it’s in vogue.”

In a research note, A.G. Edwards & Sons analyst Robert Buchanan said: “We continue to love the company but remain neutral on the stock. These days, Penney’s department stores are gaining impact by virtue of a more narrow and authoritative approach to merchandise — also getting a jump on the competition with respect to promotions.”

However, “with much of the low-lying fruit having already been plucked off the branch in terms of improved merchandising and marketing in the core business…further gains will be harder to achieve and lesser in magnitude, percentage-wise, over the next 12 to 18 months.”

For the nine months, net income leapt to $203 million, or 68 cents a diluted share, from year-ago earnings of $3 million, which translated to a loss of 7 cents a diluted share. Sales for the period gained 1.5 percent to $22.8 billion from $22.46 billion a year ago.

For the fourth quarter, the Plano, Tex.-based firm is looking for operating earnings of 60 cents a share, up from 35 cents a year ago. Comp-store sales in its department stores are expected to inch up about 2 percent.

Penney’s also noted that pension expense, which had previously been projected at 20 to 30 cents a share in 2003, would come in closer to 30 cents. Looking even further into the future, the firm, a leader in online apparel, expects its Internet business to post annual sales of $1 billion within the next five years.