J.C. Penney Co. Inc.’s shares moved sharply higher Friday as investors looked past its 78.2 percent drop in third-quarter net income and focused on its improved margins and holiday outlook.

This story first appeared in the November 16, 2009 issue of WWD. Subscribe Today.

Myron E. “Mike” Ullman 3rd, chairman and chief executive officer, said the company’s sourcing operations were paying dividends in both merchandise and gross margins.

In the three months ended Oct. 31, net income fell to $27 million, or 11 cents a diluted share, from $124 million, or 56 cents, a year ago. Results came in ahead of Penney’s initial guidance, which ranged from a loss of 5 cents to earnings of 5 cents. Excluding pension-related items in both quarters, earnings from continuing operations fell to 30 cents a share from 46 cents a year ago.

Sales for the quarter decreased 3.2 percent, to $4.18 billion from $4.32 billion, and slid 4.6 percent on a comparable-store basis. Shoes and women’s apparel were the best-selling categories and the strongest region was the Southwest, where the liquidation of Mervyns last year opened up some growth opportunity.

“With higher sales levels at our intended promotional price and less at clearance price, as well as more frequent deliveries of style-right merchandise, we have much better flow-through to the bottom line,” said Ullman on a conference call, adding the company eliminated several unprofitable promotional events during the quarter.

The 1,109-door chain projected fourth-quarter earnings of 70 cents to 85 cents a share, a range that allows for some upside from analysts’ forecast of 82 cents as well as its own earlier full-year guidance in August. Coming after more cautious projections from retailers including Wal-Mart Stores Inc., Macy’s Inc. and Kohl’s Corp. earlier in the week, the upbeat outlook helped lift Penney’s shares $1.82, or 6.2 percent, to $31.21 on Friday.

The ceo also trumpeted his firm’s gross margins, which rose to 40.6 percent of sales from 38.5 percent. “The margin improvement was positively impacted by our product development and sourcing and planning and allocation expertise, which continues to give us improved inventory flow,” he said.

Penney’s will use its in-house production resources to relaunch the Liz Claiborne brand next fall under the terms of an exclusive deal cut last month. The brand will replace Liz & Co. and be carried as a full lifestyle collection in more than 30 categories.

“Liz is the most sought-after women’s apparel brand by our customers,” Ullman said. “Due to our product-development…capabilities, the brand will now be available to customers at more accessible price points than ever, a win — an improved value for the customers — and a win in gross margin improvement for us.”

The industry has been abuzz over the last month, measuring the prospects of the Claiborne relaunch against the performance of American Living, an exclusive line at Penney’s that is produced by Polo Ralph Lauren Corp. and was launched with much fanfare in 2008.

Asked on the conference call to compare the revenue potential of the two brands, Ullman said: “Right now, they’re both kind of neck and neck in terms of the size of the businesses, and they sit side by side. I think they have a very distinctive style for each — they are not the same. So I hope that they continue to compete vigorously and that both do really well.”

For the nine months, net earnings, including the impact of the pension items, fell 85.9 percent to $51 million, or 22 cents a share, on a 5.7 percent slide in sales to $12.01 billion.

“Even against this economic backdrop, consumers want to make the holiday season special for their family and friends,” Ullman said. “We expect them to shop for the most part on a very tight family budget.”

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