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Tickers in this Article: JCP, RL, JWN, SHLD, WSM
Year-to-date, consumer discretionary is one of the best performing sectors in the S&P 500. Top on that list is the retailing industry, with many department store chains boasting gains between 20% and 60%. JCPenney (NYSE:JCP) stock is up some 30% so far in 2009, which is solid news for existing shareholders. Given the strong run, Penney's appeal is more uncertain for prospective investors, despite a number of promising signs. (Learn to pick investments on your next trip to the mall in our related article Analyzing Retail Stocks.)

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JCP First Quarter Review
Total sales declined 5.9% as same-store sales dropped 7.5%, which management, despite the negative direction, boasted was ahead of expectations. It also cited strength in women's apparel and the recently launched American Living apparel and home goods brand developed in conjunction with Ralph Lauren (NYSE:RL). In regards to the housing market, management stopped short of announcing a recovery, but stated that trends in its home division indicate demand improvements "have taken a step in the right direction," which is good news for pure-play retailers such as Williams-Sonoma (NYSE:WSM).

The opening of nine new stores during the quarter was not enough to offset the comparable store decline. However, Penney's still was able to pursue its overall strategy of locating stores closer to consumers' homes, as internal studies demonstrate that distance from its customer base and the amount of time customers spends in store are directly related. For the most part, Penney's has adapted to the top line struggles that are adversely affecting the majority of players in the industry. Last week, upscale rival Nordstrom (NYSE:JWN) reported a double-digit same-store sales decline. Sears (Nasdaq:SHLD) also posted a double-digit comp decline, although sales at Kmart fell a more modest 2.1%. Industry conditions are largely out of the control of these firms, which has caused them to shift focus to inventory and other expense controls.

JCPenney was no exception, as it boosted gross margins to 40.5% of sales and reduced inventory 12.4%. The overall dependency on markdowns drove product sales. Management also stated that SG&A expenses were "well managed," as they declined 4.7% from the same quarter last year. Unfortunately, expenses to shore up the company's pension plans served to reduce reported earnings to 11 cents per diluted share.

JCPenney expects second quarter sales to fall 7-10%, a same-store sales decline of 9-12% and earnings per share to range between 15 cents and 25 cents. Full-year guidance calls for a comparable store sales decrease of 9% and earnings per share between 50 cents and 65 cents.

Bottom Line
Based on the top end current full-year earnings guidance of 65 cents, JCPenney now trades at a very lofty P/E of approximately 40. However, the bottom line is being depressed by the economic downturn. Penney's balance sheet is strong; it ended the quarter with more than $2 billion in cash against just under $3 billion in long-term debt. Analysts look for full-year earnings to eventually recover to $1.20 per share, with further upside potential once consumers start spending again. Finally, investors can count on a 3% dividend yield while waiting for this to occur. (Read Buy When There's Blood In The Streets to learn how contrarian investors find value in the worst market conditions.)

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