JCPenney Improved But Still Cautious

By Greg Sushinsky | May 19, 2010 AAA

JC Penney (NYSE: JCP) joined the retail parade with a positive first-quarter earnings report. Both sales and income were up, but the company gave a cautious outlook and is still lagging its retail competitors.

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Retail Bonanza
Retail sales have been rising, particularly as of March. Retail stocks have been on a tear, as many have risen 50% or more in the last year. JCPenney has not fully participated in this rise, as its shares are trading in the mid-range of its 52-week stock prices. Investors have seen JCP lagging in its operations compared to the likes of Kohl's (NYSE: KSS) and the resurgent Macy's (NYSE: M).

JCPenney earned $60 million in profit in the quarter, usually the weakest quarter of the year for retailers. Last year's quarter saw net income of $25 million. Earnings per share were 25 cents this quarter compared to 11 cents in last year's same quarter. Revenue rose from $3.89 billion to $3.93 billion.

The strongest areas for the retailer were the men's department, shoe department and women's handbags. JCPenney continues to struggle with its home-goods department, which was the only one of its merchandise areas that didn't register sales gains.

Outlook Cautious
The company expects its annual EPS to reach $1.64 this year. Customers remain cautious and the economy remains unpredictable, JCP chairman and CEO Myron E. Ullman III told investors on a conference call. While JCPenney, along with Kohl's, Macy's and Nordstrom (NYSE: JWN) have all shown robust increases for their first quarter, JCP's progress is not as robust as the others. Macy's, with its newfound momentum, has announced it has JCPenney in its sights. Macy's is aggressively going after the rival department store on its home turf - in the malls. Macy's renewed strength could be a concern for JCPenney, as JCPenney's less-solid recovery makes it more vulnerable to long-term dents from Macy's salvos.

Luxury's Return
Although JCP mostly lives in the mid-price merchandise area, the tremendous quarter for Nordstrom and good news at Tiffany (NYSE: TIF) has indicated a high-end recovery. Although the mid-line department store retailers are doing better than they did, the high end is ramping up even more. Tiffany's recorded a 20% increase in the last holiday season at its anchor store in New York City. The middle class recovery, as per the conservative outlook from JCPenney, is more fragile.

Bottom Line
So given the headwind of both the tentative JCPenney consumer and the ferocious competition from Macy's and other mid-line department stores, fundamental investors should hold off on JCP stock. It's prudent to wait a few quarters to see if Penney solidifies its execution and earnings momentum. (Read Analyzing Retail Stocks to learn about the most important metrics to look at when analyzing retail stocks.)

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