Retailer JC Penney's (NYSE:JCP) strategy to improve both its product line and its operations appears to be paying off, as it delivered a solid quarter of earnings. Penney posted modest gains in total net sales and same store sales, as well as net income, as it continues edging forward.

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Better Brands
Penney's initiative to carry higher lines, such as from Spain's fashion chain Mango, cosmetics from Sephora, as well as the Liz Claiborne (NYSE:LIZ) line, are all part of re-fashioning the department store's merchandise. The more exclusive merchandise is an attempt to appeal to younger shoppers. The addition of Call It Spring, Modern Bride, St. John's Bay and Worthington, along with the Liz Claiborne, Mango and Sephora lines, all worked to draw younger, more affluent customers. Penney has been making changes to better compete with rivals such as Macy's (NYSE:M) and others.

Paying Off
The moves Penney has been making are getting results. Revenue was up slightly, 0.4%, to $3.943 billion from $3.929 billion in the year ago quarter. Penney closed its catalog and outlet operations, which cut down sales. Same store sales rose by 3.8%. Earnings per share was 28 cents on net income of $64 million, compared to 25 cents on $60 million a year ago. Analyst estimates had called for 24 cents a share.

Improved Operations
In addition to closing down its catalog sales, Penney ramped up its internet sales by 6.6% to $376 million. The company expects its change in inventory policies as well as cost-cutting initiatives to add significantly to profitability. It expects margins to increase, although gross margins were down by 2% in the quarter to 40.5% of sales due to the shedding of the catalog and other under-performing units.


Penney's Direction
Penney's plan to compete with Macy's, Dillard's Dept. Stores (NYSE:DDS), and other mid-level chains with a touch of higher line merchandise will serve to better define its niche. It can be problematic for department stores to fall into a vague niche category, neither a discount like Sears Holdings' (Nasdaq:SHLD) K Mart or an upscale Saks (NYSE:SKS) or Nordstrom's (NYSE:JWN). So along with its stores-within-stores of more high-line merchandise, Penney has been raising some of its prices. So far, as in the case of Macy's, its middle-class customers have been resilient and keep coming.

Penney's Outlook
The company raised its profit outlook for its full fiscal year to a range of $2.15 to $2.25, a 15 cent increase from earlier. Last year's EPS was $1.59. CEO Myron Ullman expects the package of initiatives to return to high profit margins by 2014, with the goal of earning $5 per share profit by the same time.

Bottom Line
The stock price had been pushed up to its highest since 2008, until recently. The company has attracted billionaire William Ackman's Pershing Square Capital Management as its largest investor, to help forge strategy and keep nudging management forward. So far, Penney's is on a promising road.

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Tickers in this Article: JCP, LIZ, M, DDS, SHLD, SKS, JWN

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