NEW YORK — J.C. Penney Co. Inc. is bucking the trend.
Based, in part, on stronger-than-expected comparable-store sales in its department stores, the retailer said its third-quarter operating earnings would exceed 21 cents per share. Wall Street had been looking for 19 cents. The firm’s Eckerd drugstore chain has also seen continued improvement in operating profits.
Shares of the Plano, Tex.-based firm were up 55 cents, or 2.9 percent, to close at $19.47 on the New York Stock Exchange Monday. For how the rest of the market and other retailers fared, see story on page 2.
Penney’s also said department-store comps during the fourth and final week of its fiscal month, propped up by cooler temperatures and a marketing program, continued ahead of plan. For the full month, across-the-board strength led the retailer to a mark “well above” the planned 3 to 4 percent sales gain. Last week, Penney’s said its department stores were headed toward at least a high-single-digit comp run-up for October.
Analysts saw the results as good news, but took somewhat cautious stances as the firm is still in turnaround mode and has much work to do.
A.G. Edwards & Sons equity analyst Robert Buchanan predicted October comps at Penney’s department stores would be up about 10 percent on the strength of “its merchandising and marketing — it’s really everything except the systems.”
Merchandise assortments, he said, are much narrower and deeper, “making fewer but stronger key-item statements.” While the retailer, along with the rest of the industry, hasn’t marketed any truly new or novel merchandise, Buchanan gave Penney’s credit for being in tune with its customers.
Part of that is being able to effectively wield markdowns to keep merchandise moving while caressing the customer’s psyche. “These days, ‘on sale’ is customer code for ‘it’s OK to buy,’” he said. “It almost doesn’t matter if it’s a good value or not, it has to be on sale.”
On the flip side, he added, the company is doing a good job optimizing markdowns, going the most cost-effective route of taking reductions earlier and deeper.
While October has obviously gone the firm’s way, the department stores in August and September posted a comp rise of 2.9 percent and a drop of 3.1 percent, respectively. In all, the division’s same-store sales rose during five of the last nine months. However, second-quarter comps slid 2.4 percent as the firm digested higher-than-expected sales in the preceding quarter that left inventories in certain categories drained.
“They’ve got a lot of work to do on the infrastructure,” Buchanan said. “They still have to open a number of their distribution centers and they still have to install improved replenishment systems. Penney’s is missing out on a lot of sales of their best-sellers simply because they can’t replenish key-color items.
Speaking of the firm’s chief executive, Buchanan said, “Allen Questrom has done a great job improving the art of retailing at J.C. Penney. Next comes the science of their program.”
Philip Zahn, a fixed-income analyst with Fitch Ratings, added that, while Penney’s top line has benefited from better merchandise, “A lot of retailers are benefitting from a littler cooler weather.” Accordingly, Zahn said, he couldn’t be sure sales trends would continue as strongly. The firm could also be picking up from more traditional department stores that have higher prices, he said.
Salomon Smith Barney analyst Deborah Weinswig, in a research note, described the comp trends as “encouraging.” While “particularly impressed by the strength in the apparel business,” she’s now looking for comps to be up 7 to 9 percent for October.
“Department store buyers who started last year are starting to have a true impact on the overall business, as improved merchandise is helping make J.C. Penney a destination for apparel,” Weinswig noted.
Marie Menendez, who’s a fixed-income analyst with Moody’s Investors Service, noted, “They’re doing a lot of things and I find it hard to say which one we’re seeing today.”
Penney’s, she said, prepped the market well to expect a multiyear turnaround: “They didn’t make any promises they couldn’t keep. They’re on schedule with their turnaround. On the question of the ultimate effectiveness of it, they’re still too far from the finish.
“The final chapter really hasn’t been written yet. They have to show they can sustain the improvements in the look of the store, sustain the operational improvements and they have to sustain the customer traffic.”