Department store retailer J.C. Penney (NYSE:JCP) reported third quarter results last Friday that failed to impress investors. Sales are seeing a modest boost as consumer spending trends improve, but are lagging the industry overall. A focus on co-developing brands could help going forward, but at the current valuation the company will need to see a substantial sales and profit jump.

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Third Quarter Review
Total net sales eked out 0.2% growth to just under $4.2 billion as same-store sales growth of 1.9% and higher internet sales were able to offset the closing of its Big Book catalogs and subsequent loss of sales from this channel. The company noted particular strength in the shoes and men's apparel categories and geographic strength in the southeast and southwest portions of the United States.

A Liz Claiborne (NYSE:LIZ) brand of apparel that is exclusive to Penney's was also singled out for strong performance, as was the store-in-store Sephora makeup brand concept. Like rivals, the company is increasingly focusing on unique brands that are co-developed with fashion designers from the likes of Liz Claiborne and Ralph Lauren (NYSE:RL), the last of which offers the American Living brand in JC Penney stores. This will continue and management plans on rolling out the Sephora business in more stores going forward.

Lower pension expenses sent reported operating income ahead nearly 16% to $124 million, though management detailed that operating margins were about flat from last year's levels when looking at the core operations. Lower interest expense helped push reported net income up more than 63% to $44 million, or 19 cents per diluted share. This came in ahead of analyst predictions. On a recurring basis the company estimates that earnings improved more than 13%.

Outlook
For the full year Penney is calling for earnings between $1.40 and $1.50 per share. It projects a low single digit increase in same-store sales and analysts current project total sales growth of just over 1% for total sales of almost $18 billion. (For related reading, take a look at Can Earnings Guidance Accurately Predict The Future?)

So far this year, J.C. Penney is seeing a more modest sales recovery compared to a number of peers. Macy's (NYSE:M) has been reporting impressive results on a combination of increased consumer confidence and a more localized merchandise approach in its stores.

The Bottom Line
In terms of sales, Sears Holdings (Nasdaq:SHLD) still qualifies as the largest department store firm given its namesake and Kmart store bases. Its results continue to lag the industry, though. J.C. Penney is ranked third in the industry behind Macy's. Out of the three, Macy's is looking the most interesting from an investment standpoint. Sears has been a constant laggard while J.C. Penney isn't yet experiencing much of a sales recovery and currently trades at a lofty forward P/E of more than 20.

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Tickers in this Article: JCP, M, SHLD, LIZ, RL

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