J.C. Penney Makes the Right Moves

The retailer's earnings easily beat estimates, indicating its turnaround is complete.
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Updated from 8:17 a.m. EST

J.C. Penney

(JCP) - Get Report

has evolved from a department store chain struggling to turn its business around into a retailing force.

The company posted a 65% jump in fourth-quarter earnings Thursday. The growth was partially boosted by tax benefits related to its divested Eckard's drugstore chain, but even with that gain aside, the company's profits blew past estimates.

The retailer earned $551 million, or $2.34 a share, in the quarter, compared with $333 million, or $1.17 a share, a year ago. The latest quarter included earnings from discontinued operations of 42 cents a share and the one-time tax gain of 21 cents a share. Adjusted earnings of $1.71 a share were 8 cents ahead of the Thomson First Call estimate.

J.C. Penney's sales rose 4.2% from a year earlier to $6.2 billion, reflecting a 2.6% rise in same-department store sales. Analysts were forecasting overall sales of $6.19 billion in the quarter. Overhead expenses were roughly flat at $1.64 billion.

"As we look ahead, we recognize that there may be short-term disruptions caused by industry consolidation and that our customer continues to be faced with issues such as high energy prices and changes to consumer credit payment terms," J.C. Penney said. "Nevertheless, we are focused on each of the initiatives in our Long Range Plan and capitalizing on the many opportunities that lie before us."

For the current first quarter, J.C. Penney expects to earn 80 cents a share, compared with the analyst' mean estimate of 79 cents a share. For the year, the company sees earnings of $4.14 to $4.24 a share, compared with the analyst view of $4.24 a share.

Shares of J.C. Penney were recently up $1.24, or 2.2%, to $57.87.

The company, after buying back $2.2 billion of stock during 2005, set a new share repurchase authorization of $750 million that it expects to complete in 2006, It also raised its annual dividend by 44% to 72 cents.

Meanwhile, J.C. Penney is embarking on the largest marketing push in its history, including a new "virtual" store in Manhattan and a major sponsorship of the upcoming Academy Awards.

"There aren't too many companies these days that are going to do share buybacks and $800 million in capital expenditures," says Richard Hastings, senior retail sector analyst with Bernard Sands. "So, this is a retailer that is generating a tremendous amount of cash and they're firing on all cylinders, posing a real threat to competitors in many different retail spaces."

Two years ago, J.C. Penney was lumped in with a department store sector that looked increasingly irrelevant as discounters and specialty chains stole market share from the group by the truckload. The company's former chief executive, Alan Questrom, orchestrated a successful turnaround that included the divestiture of the Eckard's chain, but Wall Street was uncertain whether the rebound would continue under the new management team led by CEO Myron Ullman.

Now, those concerns are dwindling. J.C. Penney has continued to grow sales and profit margins with its private label sourcing and its widely acclaimed Internet operations. For the fourth quarter, the company reported a 22% rise in online sales.

"They're facing more difficult sales comparisons later this year, but even if comps slow, this company will still be growing its bottomline," Hastings says.

On a conference call with analysts, Ullman said the acquisition of May Department Stores by

Federated

(FD)

offers J.C. Penney an opportunity to steal market share and find new "real estate opportunities."

The retailer expects to open about 27 new stores in 2006, with the majority being off-mall locations.

When asked whether the recent heavy snowstorm in the Northeast would affect the company's sales, Ullman reiterated his previous guidance for the month, which calls for a slight uptick in comparable department-stores sales and direct sales.

"We're on track for the month of February, and we're not going to use the storm as an excuse," Ullman said.