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J.C. Penney expects higher sales, gross profit this year

Customers ride the escalator at a J.C. Penney store in New York August 14, 2013. REUTERS/Brendan McDermid
Customers ride the escalator at a J.C. Penney store in New York August 14, 2013. REUTERS/Brendan McDermid

By Phil Wahba

(Reuters) - After two years of massive losses, J.C. Penney Co Inc appears to be turning a corner.

It reported improved sales and profit margins for the holiday season quarter, and the department store chain expects to make further strides this year.

Penney forecast that comparable sales, which include e-commerce and revenue at stores open at least a year, will be up by a "mid-single digit" percentage for this fiscal year, and it expects "significant" gains in its gross profit margin.

Shares were up 16.1 percent to 6.92 in afterhours trading, on top of a 5.7 percent increase the regular session.

The stock, still well below its $21.70 price of a year ago, has been under pressure for months on Wall Street speculation that slow sales growth would force the debt-laden company to try to raise more money after doing so three times in 2013.

But the retailer quelled those concerns when it said it expected to have $2 billion in cash and lending capacity at year-end, the same level as at the start.

"The 2014 liquidity guidance implies that the business can self-fund," said William Frohnhoefer, an analyst with BTIG.

Penney is trying to win back more shoppers after it tried unsuccessfully in 2012 to go upmarket and alienated many long-time customers, leading to a 30 percent sales decline over two years.

To do so, in the last few months, the retailer has ditched brands that were part of the failed re-invention but didn't catch on, such as Bodum and JoeFresh Kids, and gave more floor space to popular in-house brands such as St. John's Bay.

In the fourth quarter, the retailer reported its first quarter of comparable sales gains, a rise of 2 percent, in almost two years.

Clearing out the jettisoned brands took a big toll on Penney's gross margin, a gauge of merchandise profit that came in at 28.4 percent of sales during the fourth quarter, less than Wall Street expected. Penney said it had to offer bigger-than-expected bargains during a particularly competitive holiday season.

But Penney said it has gotten that clearance merchandise out of its system and does not expect any lingering impact on gross margin this year. The company projected gross margin will improve "significantly" this year on its way back to historical levels of 39 percent.

"The most challenging and expensive parts of the turnaround are behind us and the work we did in 2013 has laid the foundation for continued progress in 2014," Penney Chief Executive Myron Ullman told analysts on a conference call.

REBOUND IN ONLINE SALES

Penney's online sales also rebounded, helped by Ullman re-integrating planning and buying teams for its digital and stores divisions.

For the fourth quarter ended Feb 1, Penney reported net income of $35 million, or 11 cents per share, compared with a loss of $552 million, or $2.51 per share, a year earlier.

Excluding certain items but including a pension cost, Penney had an adjusted loss of 68 cents per share during the quarter, while Wall Street was expecting a loss of 82 cents.

Shares have fallen 75 percent in the last year. Its stock is particularly volatile: Some 39.4 percent of shares are held short by investors betting on shares falling.

(Reporting by Phil Wahba in New York; Editing by Cynthia Osterman)

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