Department store chain JC Penney (NYSE:JCP) reported flat operating results for its second quarter, with earnings and revenue essentially even with the year ago quarter. The middle-income-customer oriented chain used aggressive markdowns during the quarter. Penney gave Q3 guidance which was lower than previous estimates. (For more on investing in retail, read The 4 R's Of Investing In Retail.)

TUTORIAL: Earnings Quality

A Challenging Retail Economy
With the uncertainty in the economy and the challenges facing the middle-income consumer, Penney, along with other retailers, emerged from the quarter into more ongoing economic uncertainty. While consumers increased spending on gas, autos and furniture in July, consumer sentiment showed the lowest confidence level in the last 30 years. Businesses have reacted accordingly, cautiously keeping inventories tight. As the retail season enters the critical back to school time in August, Penney comes off a flat second quarter performance.

A Challenging Quarter
Penney reported income of $14 million, or 7 cents a share, compared to $14 million (6 cents a share) in last year's second quarter. Revenue was down slightly to $3.91 billion from $3.94 billion. Same store sales rose 1.5%. Gross margins were down to 38.3% from 39.4 in the prior year's quarter, reflecting the aggressive promotion the retailer was forced into.

Penney has been upgrading its fashion line to exclusive merchandise, such as Liz Claiborne and Claiborne women's wear, along with other names such as European designer MNG by Mango. The company reported the exclusive brands were selling well, while more basic items were not doing as well. Penney continues to cut costs, closing stores, including outlets and a call center, and instituted an early retirement program, yet still faces the press of having to pass along higher raw material costs on clothing. The company delayed its back to school season by a week, and expects August results to reflect the ongoing challenging economic atmosphere. (To help you take advantage of Quarterly earnings season, see Strategies For Quarterly Earnings Season.)

Recent Retail Results
Other retailers have been navigating the various economic headwinds better than Penney has. Macy's (NYSE:M) has benefited from its ongoing strategic remake, which has focused on its merchandising and private label offerings, along with inventory management. More importantly, it has incorporated a more decentralized store management approach, with local customer emphasis, called "My Macy's". This has been highly successful, as in its recent second quarter, it achieved earnings per share of 55 cents, compared to 36 cents a share in the second quarter the prior year. Revenue rose in the quarter to $5.939 billion from $5.537 in last year's same quarter.

Nordstrom (NYSE:JWN) reported more of the same. The high-end retailer had 21.2% earnings growth for the quarter, with a revenue increase of 11.7%. Same store sales rose 7.3%. The company raised guidance, and has flourished with its high quality apparel and cosmetics. Dillard's (NYSE:DDS) posted an outstanding quarter also, earnings 30 cents per share against the 3 cents in the prior year's quarter. Same store sales advanced by 6%. Revenue also edged up. Only Sears Holdings (Nasdaq:SHLD) has continued to consistently lag the rest of the department store field.

The Bottom Line
Penney is in a hard place for a retailer right now. The company has been restructuring and trying to re-position itself for growth on the fly as the economy has been turbulent. As this continued uncertainty filters through the economy, it has dented the middle-income consumer notably and rattled her confidence. Penney is just going to have to ride these steep economic waves as the retail sector may be buffeted for the next couple of quarters. (To many, corporate restructuring can be an opportunity, for more check out Cashing In On Corporate Restructuring.)

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