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Ullman Touts Successes at Penney’s Annual Meeting

Analysts remain cautious on the company's long-term prospects.

Myron “Mike” Ullman 3rd, chief executive officer of J.C. Penney Co. Inc., used the company’s annual meeting in Plano, Tex., Friday to tout its progress over the past year.

But while Wall Street analysts agreed Penney’s is showing improvement, they generally offered a cautious view on the retailer’s long-term prospects.

“You see in the first-quarter performance that we are hitting our stride,” said Ullman, who returned in April last year to help the retailer recover from merchandising and pricing missteps under Ron Johnson. “We believe we have managed the components well. We know we have a lot of work left to do.”

Investors pushed the stock up 16.3 percent to $9.73 Friday following the company’s first-quarter sales gain of 6.3 percent, to $2.8 billion. Losses for the quarter widened slightly, but came in better than analysts projected.

Penney’s store and e-commerce operations have stabilized; the company secured a new $2.35 billion line of credit, and private-label manufacturers and national brands are returning to the fold, the ceo told investors at the meeting.

“I’m also particularly pleased with the level of our inventory,” Ullman noted. “Many of our competitors ended the season with a difficult inventory position. Our inventories are very clean and well positioned for the next quarter.”

Penney’s is poised to capitalize on Father’s Day and back-to-school opportunities, he said, acknowledging that both were lackluster businesses last year.

“We do believe we will execute buying and selling merchandise profitably, which is our objective,” Ullman asserted.

Private brands have risen to 48 percent of the merchandise mix — close to his goal of 50 percent and well above last year’s 38 percent, Ullman said. Among the private brands that are back on Penney’s racks are Ambrielle intimates and St. John’s Bay.

Still, Wall Street is keeping a close watch on the company.

Credit analysts at Barclays upgraded the stock to “market weight,” noting that liquidity concerns are off the table “over the near term.” They noted that with retailers such as Kohl’s Corp., Wal-Mart Stores Inc. and Nordstrom Inc. reporting results below expectations and Macy’s Inc. noting a still-heavy promotional environment, “there are no indications (to us) that the backdrop for midmarket department stores has stabilized.” They also said that Penney’s “momentum may stall out past holiday 2014, and expect further comp, margin and EBITDA [earnings before interest, taxes, depreciation and amoritzation] growth to become incrementally harder.”

Wells Fargo equity analyst Paul Lejuez wasn’t too impressed, noting that while the 6.2 percent comparable-store sales Penney’s reported beat consensus estimates for a 3.8 percent rise, it was less impressive because half of the comp came from the home category, which benefited from the closure of the home departments in the year-ago quarter. Also the improvement was mostly a “shift toward more private-label merchandise, not more profitable sales on like product.”

Sterne Agee analyst Charles Grom said that the stronger-than-expected first-quarter results “should alleviate concerns regarding both an imminent need to raise capital and a bankruptcy filing.”

But Grom added that he still had reservations regarding a turnaround, noting that the “reality is Penney’s is taking steps in the right direction, but traffic needs to recover in order for us to become true believers.”

Penney’s is working hard to bring shoppers back to its stores and Ullman its new “Fit” campaign — with the tag line “When it fits, you feel it” — is resonating with customers.

“We’ve seen an increase in our traffic [and] much better conversion in our stores,” he said.

Launched in February during the Academy Awards telecast, the campaign embraces diversity and is expected to gain momentum, he explained, crediting the idea to Debra Berman, the senior vice president of marketing hired last summer from Kraft, he noted.

“We actually are America’s most important store for the middle class,” Ullman claimed. “In many ways we got away from that during some difficult periods. We define ‘Fit’ as fitting the customer’s style, skin color, occasions she celebrates, as well as her wallet.”