J.C. Penney reports sharp drop in 3Q profit but boosts outlook on expected sales improvements

J.C. Penney reports sharp drop in 3Q profit

NEW YORK — Department store chain J.C. Penney Co. reported a 78 percent drop in its third-quarter earnings because of a big expense for its pension plan, and its revenue slipped from a year earlier.

The moderate-price retailer upgraded its annual profit and sales outlook for the year because it is selling more items at full price or on planned promotions, but the outlook for holiday shopping remains uncertain.

After retailers used unprecedented price-cutting in a desperate attempt to liquidate mounds of inventory last Christmas, Myron Ullman III, chairman and chief executive, told investors during a conference call Friday that the big question this holiday season is, “What’s the customer’s reaction going to be to less clearance.”

Given high unemployment and tight credit, consumers will “shop for the most part on a very tight family budget,” Ullman said.

The company expects sales at stores open at least a year, a key measure of a retailer’s health, to fall between 4 percent and 6 percent in the quarter that includes the holidays, less than the 10.8 percent drop it suffered in the period in 2008. It expects to earn 70 cents to 85 cents per share for the period, compared with 95 cents a year ago, on revenue 3 percent to 5 percent lower than a year ago.

The retailer, which is based in Plano, Texas, said it earned $27 million, or 11 cents per share in the third quarter. That compares with $124 million, or 56 cents per share, a year earlier.

The third-quarter results included a charge of $73 million, or 19 cents per share, to write down the value of the company’s pension-plan assets. Excluding that impact, adjusted income from continuing operations was $72 million, or 30 cents per share. That’s down from $103 million, or 46 cents per share, in last year’s third quarter, excluding a pension plan benefit.

The boosted annual outlook and better earnings than the company forecast got investors’ attention, and the stock rose $1.82, or 6.2 percent, to close at $31.21 Friday.

Revenue fell 3.2 percent to $4.18 billion, the same amount forecast on average by analysts surveyed by Thomson Reuters. Sales at stores open at least a year, a key metric for retailers, fell 4.6 percent in the quarter.

Department store chains have been challenged as shoppers worry about job security and cope with tight credit, but some consumers are beginning to treat themselves to small indulgences.

Penney and other retailers have cut inventory and other costs in response to slow consumer spending. Penney also has expanded its assortment of exclusive brands, including a recently announced deal with actresses Mary Kate and Ashley Olsen to sell their brand Olsenboye starting in spring 2010.

Ullman said exclusive brands have energized Penney’s sales of women’s clothing, its top-performing category. Home furnishings sales remain soft.

Penney’s biggest coup was a deal with Liz Claiborne Inc. announced last month. Penney will be the sole U.S. store to sell the Liz Claiborne and Claiborne lines of women’s wear the company’s Liz & Co. and Concepts by Claiborne brands. The deal includes accessories, shoes, household products and men’s clothing, as well as women’s.

Ullman predicted that Penney’s Liz Claiborne sales will double in five years.

For fiscal 2009, the company expects sales at its stores that have been open at least a year to fall 6.5 percent to 7 percent, less than the drop of 7 percent to 7.5 percent it forecast earlier.

Penney also raised its forecast for full-year earnings per share — to 93 cents to $1.08 from 75 cents to 90 cents. Analysts surveyed by Thomson Reuters expects $1.05 per share.