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Friday, August 15, 2008

J.C. Penney's Profit Declines 36%

Cost-Control Effort Helps Boost Shares; Weak Sales Likely

J.C. Penney Co. said second-quarter profit fell 36%, but the retailer's shares moved higher on cost controls and inventory management.

Penney also gave a third-quarter earnings forecast that missed analysts' estimates as it expects back-to-school sales to be weaker than last year and to occur later.

Even so, the Plano, Texas, retailer's shares rose Friday. In 4 p.m. composite trading on the New York Stock Exchange, they rose $3.11, or 8.4%, to $39.94.

Net income fell to $117 million, or 52 cents a share, in the three months ended Aug. 2, from $182 million, or 81 cents, a year earlier. The company said last week that sales dropped 2.5% to $4.28 billion in the quarter.

Penney said it expected per-share profit to be 70 cents to 75 cents a share for the third quarter, with sales forecast to decline at a rate in the low-single digits. It said it wasn't providing a full-year outlook because of economic uncertainty. Analysts' consensus profit estimates were 50 cents and 76 cents a share for the second and third quarters, respectively, according to Thomson Reuters.

Chief Executive Mike Ullman said he is keeping inventory lean and managing expenses to lessen the impact of declining sales, a strategy being repeated across the industry as consumer spending slows.

Penney "is effectively managing its inventory position," said Morgan Stanley analyst Michelle Clark. "We continue to believe the retailer will drive inventory reductions for the balance of this year, and we expect reduced merchandise margin pressure."

Mr. Ullman also said he has launched the company's biggest back-to-school product-unveiling with brands such as Decree, Dorm Life and Fabulosity, a collection designed by Kimora Lee Simmons.

"As we look into the second half of the year and into 2009, we expect the environment to remain difficult as we are seeing now," Mr. Ullman said on a conference call. He said the company's expected slower back-to-school results were factored into its third-quarter forecast.

Analysts said retailers' back-to-school sales overall have gotten off to a slow start. Teen retailer Abercrombie & Fitch Co. lowered its full-year profit forecast Friday.

These slow back-to-school results are a result of J.C. Penney's lack of electronics inventory. The stores do not sell laptops, electronics, or back to school computers, which in turn has hurt the company. If these items were to be sold in addition to back to school apparel, it could help level the company's sales and slow their decline.