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J.C. Penney

(JCP) - Get J. C. Penney Company, Inc. Report

is once again a tale of two divisions, each heading in an opposite direction.

Surprisingly, the company's department store division, including its hard-hit catalog sales, appears to be turning around. But the performance at the company's Eckerd drugstores, which buoyed J.C. Penney last year, is plunging.

Those two tales were told in the company's second-quarter report, released today. While sales and operating profits picked up at the company's department stores, they fell off at Eckerd.

Overall, J.C. Penney lost 2 cents a share on $7.31 billion in sales. That compared with a loss of 5 cents a share in its year-ago quarter on $7.2 billion in revenue.

Analysts surveyed by Thomson First Call were expecting a 5-cents-a-share loss on sales of $7.31 billion.

While the overall numbers compared favorably with analysts' estimates, Eckerd clearly underperformed. The drugstore chain's overall sales grew by 2.3%, but its same-store sales fell dramatically and its operating profit dropped by more than 25%.

Eckerd is suffering from noncompetitive pricing, a lack of prime store locations and poor inventory management, company officials acknowledged. J.C. Penney is taking steps to address each of those issues, company officials said.

"I am disappointed with Eckerd's operating results," said Wayne Harris, the drugstore chain's CEO. "Our results over the past six months are not at all acceptable."

J.C. Penney has been in turnaround mode for the last several years. The company has closed many of its department stores, laid off workers and restructured its catalog department.

While taking these steps, the department store's sales have struggled. Meanwhile, its catalog sales dropped on a quarterly basis for three years straight.

During all of this, the company has been helped by sales at Eckerd. Boosted by growing sales of pharmaceuticals, as well as selective store closures, the drugstore chain has routinely posted strong same-store sales compared with the rest of the company.

But those trends have taken a turn this year.

In the second quarter, same-store sales, which compare results at outlets open for more than one year, grew by 2.1% at J.C. Penney stores, while falling 0.8% at Eckerd stores. In the same period a year ago, the department stores posted a same-store sales decline of 2.4%, while the drugstores' comparable sales grew by 6.1%.

Overall, the company's Eckerd unit posted a pretax operating profit of $54 million on $3.66 billion in sales in the just-completed quarter. In the year-ago period, the company earned a pretax operating profit of $73 million on $3.58 billion in sales.

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Meanwhile, the department stores and catalog unit showed a pretax operating profit of $51 million on $3.69 billion in sales in the second quarter. While the segment's overall revenue was up just 1% from the second quarter last year, its profits more than doubled from the $22 million it posted last year.

One might attribute Eckerd's same-store sales decline to a difficult comparison with last year. But the chain's competitors, including





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, have posted strong single-digit same-store sales gains this year against even more difficult comparisons.

Part of the problems at Eckerd have to do with its pricing, company officials said. Eckerd management wasn't keeping track of competitors' pricing in their front-end areas, they said.

"The pricing issues have been called to our attention by analysts in the past. Thank you," Harris said. "Shame on me, and shame on us for not catching these issues ourselves."

Eckerd's store locations have also made it less competitive with rivals, officials said. The key competitive issue with drugstores is having a location that is close to customers, they said. The company said it has scaled back on a remodeling program to open new stores in Texas, Florida and other locations.

The new stores should help address the company's slow pharmacy sales, company officials said. While many drugstore chains have had trouble with their front-end sales of food products, over-the-counter medicines and cosmetics, they've typically seen high single-digit or low double-digit growth in sales of prescription drugs.

At Eckerd, front-end sales declined 6% in the quarter. Meanwhile, the company's pharmacy sales grew by just 1.7%.

"It's an issue of convenience," said company J.C. Penney CEO Allen Questrom. "That's had a big role in our comps.

Customers are going someplace else."

The company expects to have continued problems with Eckerd for the rest of the year, officials said.

In contrast to Eckerd's troubles, the J.C. Penney division has shown continuing improvement. For the first time in three years, for instance, the company's catalog unit showed a sales gain, increasing sales 3.9% from the year-ago period.

Meanwhile, the company expects sales to improve in the second half at the department store division, boosted by the recent income tax rebates and cuts.

For the third quarter, J.C. Penney expects to earn between 25 cents to 30 cents a share, while the company estimates it will earn $1.25 to $1.35 for the year.

Analysts had projected the company would earn 30 cents a share in the third quarter and $1.31 for the full year.

Eckerd again got the blame for potentially bringing the company's overall profits below Wall Street's expectations. Company officials said that Eckerd's third-quarter operating profits are likely to be below last year's levels.