Byline: Catherine M. Curan

NEW YORK — Despite soft demand for women’s apparel, particularly for outerwear, two major department store groups — J.C. Penney Co. and Dayton Hudson Corp. — reported strong third-quarter earnings Tuesday.
Penney’s earnings rose 24.1 percent to $274 million, or $1.04 a share, from $221 million, or 83 cents a share, before a special charge. In the year-ago quarter, a $23 million after-tax charge for debt redemption and a $14 million charge for a deferred tax adjustment reduced earnings to $185 million, or 69 cents.
Penney’s sales were up 8.7 percent to $5.1 billion from $4.7 billion.
In the quarter ended Oct. 29, DH reported earnings rose 55.8 percent to $67 million, or 86 cents a share, from $43 million, or 54 cents. Results for the latest quarter include a LIFO credit of 8 cents a share, against a charge of 2 cents a year ago. Total revenues rose 9 percent to $5.05 billion from $4.6 billion, with same-store sales up 3 percent. While Penney’s shares rose 7/8 to 47 3/4, Dayton Hudson’s fell 3 1/2 to 80 1/2. Both issues are traded on the New York Stock Exchange.
“DH had a blowout quarter, but the market doesn’t seem to see it that way,” said Linda Morris, an analyst at PNC Bank, Philadelphia. She suggested DH stock was declining because earnings were boosted by a $10 million LIFO credit, and would have been slightly below expectations without that special gain. In addition, selling, general and administrative expenses were slightly higher than expected. Penney’s chairman William R. Howell pointed out in a statement that the firm has posted 12 consecutive quarters of increased earnings. Daniel Barry, retail analyst at Merrill Lynch, said Penney’s earnings were one cent above the Wall Street consensus. He noted the strongest division was men’s wear, which posted double-digit sales gains. Women’s, children’s and home furnishings were up in the single digits.
“Inventories are in line,” Barry said, “but outerwear inventory is building up, and they are starting to take some markdowns.”
He is still expecting a good Christmas season, and said Penney’s expenses are in good shape. Barry estimates earnings of $1.79 a share for the fourth quarter, against $1.65.
PNC’s Morris noted that Penney’s strong categories — luggage and men’s wear, for example — were not weather-related, but women’s apparel was weak. Steven Kernkraut, managing director at Bear Stearns & Co., said Penney has a lot of momentum that should continue into the fourth quarter. He projects earnings per share of $4.20 for the year against $3.60. At DH, Robert Ulrich, chairman and chief executive officer, said, “Our third quarter was essentially as expected, with Target continuing its strong performance, Mervyn’s continuing to improve off last year’s low base, and the department store division slightly below expectations.” Target’s operating profit rose significantly on a 15 percent revenue gain, while gross margin and operating expense rate improved slightly. Same-store sales rose 6 percent.
The department store division’s operating profit and gross margin rate were essentially flat. The operating expense rate was unfavorable due to lower sales. Merrill Lynch’s Barry said the division took some markdowns because of the warm weather.
Mervyn’s operating profit improved after a significant decline last year, the company said. Same-store sales declined 2 percent.
“Mervyn’s is definitely on an uptrend,” said Barry. “However, we can’t find out how much because DH declines to break out operating figures for each division on a quarterly basis.”
Barry projects per-share earnings of $3.89 for the fourth quarter, against $3.62, and $5.80 for the year, against $4.77.
“I still think that if we have decent weather, the department store division will do well,” he said.
DH said it has not taken any markdowns as of Tuesday, Barry said, but it might have to if the weather remains unseasonably warm. In addition, the company expects a LIFO credit for the year, and that could help offset a weather-related sales slump.
In the nine months, DH’s earnings rose 60 percent to $155 million, or $1.96, from $97 million, or $1.17. Sales were up 10.5 percent to $14.3 billion, from $13 billion. Penney’s earnings rose 24.9 percent to $629 million, or $2.39, from $503 million, or $1.89. Sales climbed 8.5 percent to $13.7 billion from $12.7 billion. — Fairchild News Service

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