J.C. Penney Beats Christmas Blues

The disappointing sales have shown up in the individual reports of several retailers. Wal-Mart, for instance, has decreased its projections for same-store sales growth in December from a range of 3% to 5% to a range of 2% to 3%.

Federated, which operates Macy's and Bloomingdale's, and Target have said that their holiday comparable-store sales are coming in below their own expectations. Federated had expected its same-store sales to range from unchanged to down 2.5% for November and December combined; the company now expects sales to be down about 2.5% in November and 4.5% overall for the two-month period. Target, meanwhile, has said that its same-store sales are coming in "well below" its plan of 3% to 5% growth.

Despite the positive performance of its department stores, even J.C. Penney has had to battle some bad news this month. Same-store sales at the company's Eckerd drug store chain, which provides more than 45% of J.C. Penney's revenue, are coming in below its expectations of 6% growth, the company said Monday. Meanwhile, J.C. Penney expects sales at its catalog division to be down 20% compared with last December's.

But the performance of J.C. Penney's department store chain still stands out, especially against the background of its department store rivals. Under pressure from discounters such as Wal-Mart and Target, department stores have been gradually losing sales and market share.

Sears (S Quote), for instance, hasn't posted same-store sales gains in any month this year. Federated has posted flat or declining same-store sales in 11 of the last 12 months, and last year its same-store sales declined by 5.3% from 2000. May Department Stores, which operates the Lord & Taylor's and Foley's chains, (MAY Quote) and Dillard's (DDS Quote) have posted similar results.

While the other department store chains have struggled, J.C. Penney has been able to regain market share, notes Richard Hastings of Cyber Business Credit. In addition to posting same-store sales gains this month, the company has seen comparable-store increases at its department stores in five other months this year and flat sales last month.

On the basis of the company's positive December projections, Goldman Sachs on Monday raised its earnings estimate for Penney's fourth quarter from 60 cents to 65 cents per share. Salomon Smith increased its earnings estimate for the company from 60 cents to 62 cents per share.

J.C. Penney has been able to turn things around by creating a new, more positive image for itself through advertising, Hastings said. Also, the company's reliance on private-label products, which typically have higher profit margins than national brands, has allowed it to be flexible on price, Hastings said.

J.C. Penney's turnaround could serve as a model for its department store rivals, Hastings said.

"Department stores are not dead. Any pundit who thinks they are is mistaken," he said. "They are going to rethink their business, and department stores are going to change."

But in a research report issued Tuesday, W.R. Hambrecht's Bill Dreher cautioned investors about reading too much into J.C. Penney's December sales. The company was likely able to boost sales by increasing its promotions, Dreher said. That could cut into gross margins and possibly earnings, he warned.

"Sales strength alone will not tell the story of retailers' success," Dreher wrote. "There appears to be an enormous amount of 'slash and burn' promotions, particularly at Kmart and J.C. Penney."