Penney sees profits soar 173 percent

Don Hogsett, May 24, 2004

Helped by sharply stronger same-store sales in its core department store business, and at the same time building margins, slashing costs and keeping stockpiles tightly controlled; first-quarter operating profit almost tripled at J.C. Penney Company Inc., soaring 172.6 percent, to $229 million from $84 million a year ago.

But saddled with a $77 million one-time charge stemming from the sale of its Eckerd drug store business, now treated as a discontinued operation, overall profits dropped off almost a third, declining 32.8 percent, to $41 million from $61 million during the same period a year ago.

Continuing a rolling recovery as the retailer rebuilds its core business, department store, catalog and Internet sales climbed 8.7 percent, to $4 billion from $3.7 billion last year. Same-store sales in department stores shot up an impressive 9.5 percent, recovering from a drop of 4.8 percent in the prior-year quarter. Catalog and Internet sales improved 6.5 percent, rebounding from a slide of 11.1 percent a year ago.

Lending further support to the bottom line, average gross margin widened 90 basis points, or nine-tenths of a percentage point, to 40.1 percent from 39.2 percent the year before. Gross margin dollars, lifted by the combination of stronger margins and rising sales, improved 10.9 percent, to $1.6 billion from $1.5 billion during the opening quarter of 2003.

In another big assist, operating costs, when measured as a percentage of sales, were reduced 260 basis points, or two and six-tenths of a percentage point, to 34.4 percent from 37 percent. Measured in absolute dollars, costs held relatively steady, inching up just 1 percent, to $1.4 billion, running substantially behind the 9 percent increase in sales.

Boosted by the winning trifecta of rising sales, stronger margins and low costs, operating profits almost tripled, rocketing 172.6 percent, to $229 million from $84 million the preceding year. The retailer's operating margin — a performance yardstick that measures operating profits as a percentage of sales — improved to 5.7 percent, jumping up from 2.3 percent a year ago.

Dropping even more cash to the bottom line, Penney reduced its interest expense 12.3 percent, to $57 million from $65 million last year, generating a cash savings of $8 million.

"Sales and operating profits far exceeded our plan, reflecting the strengthening of our value position for the moderate consumer," said Allen Questrom, chairman and CEO, the architect of Penney's recovery.

Assaying the current political and global environment, Questrom said the company, while optimistic that consumer spending and the economy will continue to improve, is planning the second quarter conservatively, expecting sales to grow in the low single-digits at both department stores and the catalog/Internet business.

J.C. Penney Company Inc.

Qtr. 5/1 (x000) 2004 2003 % chg
Results stated are for continuing operations, the department store, catalog and Internet retailing businesses, and exclude results of two discontinued operations, the Eckerd drug store business, which is being sold, and the previously sold Mexican department store operation.
a-First-quarter results include $8 million in real estate and miscellaneous income, compared with $9 million during the same period a year ago; and a $77 million loss stemming from the sale of the Eckerd drug store business, compared with a year-ago benefit of $41 million.
Sales $4,033,000 $3,711,000 8.7
Oper. income (EBIT) 229,000 84,000 172.6
Net income 41,000a 61,000a -32.8
Per share (diluted) 0.13 0.20 -35.0
Average gross margin 40.1% 39.2%
SG&A expenses 34.4% 37.0%

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