Penney op-profits up, extending turnaround

PLANO, TEXAS — Shucking off a money-losing drug store business and returning to its traditional retailing roots, J.C. Penney Co. Inc. parlayed a powerhouse trifecta of stronger margins, lower costs and a big rise in same-store department-store sales into a big lift in operating profits, which virtually tripled during the second quarter.

Excluding ongoing losses at the sold-off Eckerd drug store business, Penney extended its recent turnaround, driving operating profits up 194.3 percent, to $156 million from $53 million a year ago.

But saddled with a $71 million after-tax loss at the discontinued Eckerd operation, Penney recorded a smaller net income of $1 million, virtually unchanged from a breakeven quarter the year before. The $71 million after-tax loss from discontinued operations includes Eckerd's operating loss as well as adjustments to reflect the final terms of the sale.

Driving the strong operating results, Penney pushed sales in its core retailing business up 5.8 percent, to $3.9 billion from $3.6 billion a year ago. Same-store sales in department stores climbed a hefty 7.1 percent, a big improvement over last year's 2.3 percent gain. But same-store sales in the catalog and Internet business slipped 1.6 percent following a 3.9 percent increase the preceding year.

Allen Questrom, chairman and CEO, commented, "Early back-to-school results are exceeding our expectations. A number of external factors, including higher oil prices and concerns over terrorism, could impact future consumer spending patterns, but we remain confident that our third quarter sales and operating profits will improve."

Driving the bottom line growth, in addition to stronger sales, were wider margins and lower costs. Average gross margin improved 150 basis points, or 1.5 percentage points, to 37.4 percent from 35.9 percent. Gross margin dollars climbed 10.2 percent, to $1.4 billion from $1.3 billion.

In another big assist, Penney continued to hack away at costs, reducing overhead during the quarter 110 basis points, or 1.1 percentage points, to 33.4 percent from 34.5 percent.

Further plumping profits, Penney slashed its interest expense 30 percent, to $49 million from $70 million, generating a cash savings of $21 million.

Inventories remained strictly controlled, and stockpiles rose at a slower pace than sales during the period.