Drug biz drag on Penney profits

PLANO, TX — Hobbled by persistent weakness in its Eckerd Drug store business — which masked continued progress in its core department store and catalog operations — J.C. Penney Co. Inc. recorded a 35 percent drop in third-quarter profits, to $80 million from $123 million last year.

Operating profits in the core retailing business jumped up by more than 21 percent on relatively flat sales, helped by substantially stronger margins.

But acting as a drag on the parent's bottom line, Eckerd operating profits were slashed by more than half, despite a modest bump in sales, weakened by higher costs and thinning margins.

Operating results for department stores, catalog and the Internet segment "exceeded our expectations, reflecting better execution, continued benefits from our centralized business model, and delivery of compelling value in all three channels," said Allen Questrom, chairman and ceo.

But as fair-haired as retailing is turning out to be, Eckerd remains the problem child, and it could be kicked out of the house and put up for adoption, Questrom added. "Eckerd's results, however, were below expectations due to weak sales trends. As we have stated previously, the company is in the process of evaluating strategic alternatives for Eckerd, and a decision is expected by the end of the year." Underscoring the problems at Eckerd, while sales edged up slightly during the quarter, by 2.2 percent, the crucial gauge of same-store sales fell by 1.0 percent, reversing a year ago gain of 4.9 percent.

Even as Eckerd continues to lose ground and faces an uncertain future, the core retailing business continues to improve under a Questrom-led turnaround. Operating profits in the retailing business jumped up by 21.8 percent, to $207 million from $107 million last year, as stronger margins offset somewhat higher costs. Average gross margin widened by 190 basis points, or 1.9 percentage points, to 38.5 percent from 36.6 percent. Costs climbed higher as well, but at a slower pace, rising by 100 basis points, or 1.0 percentage points, to 33.7 percent of sales from 32.7 percent a year ago.

While overall sales in the retail business were relatively flat, edging up by 0.8 percent, to $4.3 billion. Same-store sales rose even faster, by 1.7 percent. But caught up in the same consumer spending pullback that's affected most of the nation's full-price retailers, same-store sales were off their year-ago pace of a 3.9 percent gain.