Dept store, catalog biz bleed Penney 1Q profit

By Don Hogsett -- Home Textiles Today, 5/19/2003 12:00:00 AM

PLANO, TX —

With sales stalling out in its big department store and catalog business in a ferociously difficult environment for full-price retailers, first-quarter profits at J.C. Penney Co. Inc. tumbled by almost 30 percent, losing much of the momentum built up in a recent earnings recovery.

Holding the company's turnaround in check, sales in department stores and catalog fell by 7.1 percent, to $3.7 billion from $4.0 billion last year, a shortfall of $283 million. Same-store sales in department stores fell by 4.9 percent, up against a tough comparison with last year's sturdy gain of 7.9 percent.

"The past three months have represented one of the most difficult retailing environments in recent memory," said Allen Questrom, chairman and ceo. Striking a more hopeful note, he added, "We are beginning to see some signs that the environment may be improving, and we are maintaining our earnings guidance for the second quarter as well as the back half of the year." And if the retail environment improves, said Questrom, Penney could still meet its full-year earnings targets.

While same-store department store sales fell by 4.9 percent, catalog sales were off even further, falling by 11.1 percent. Internet sales, included in the catalog results, "continued their strong growth trend, increasing in excess of 25 percent," the retailer said,

Despite the shortfall in sales, average gross margin in department stores and catalog improved by 140 basis points, or 1.4 percentage points, to 39.2 percent from 37.8 percent a year ago. But offsetting any gain in margins, operating costs, when measured as a percentage of sales, climbed higher by 310 basis points, or 3.1 percentage points, to 37.0 percent from 33.9 percent. In raw dollars, however, costs inched up only slightly, by just 1.5 percent, to $1.4 billion. Pushing costs modestly higher were stepped-up advertising and transition costs for a new distribution network, as well as higher non-cash pension spending expense. Spending in those areas, the company said, was partially offset by expense savings in store labor as a result of centralized checkouts "and progress made toward eliminating in-store receiving and lower catalog expenses."

J.C. Penney Co. Inc.