J.C. Penney Shares Slip

Investors sold the retailer's shares Thursday amid concerns that heated competition could slow sales growth

J.C. Penney (JCP) said Feb. 22 that it managed to keep selling more during recent months. But the department store operator still faces a tough fight to turn itself around in the cut-throat industry.

The Plano (Tex.)-based company's total net sales rose 7.4% to $6.66 billion during the 14 weeks ended Feb. 3 compared to the same period last year. "The fourth quarter marked a very strong end to a year of great achievement at JCPenney," said CEO Mike Ullman in a press release Feb. 22.

Penney is growing sales in spite of tough competition from various and sundry. "The company will have a tough time keeping its customers from shopping more at Kohl's (KSS) and Target (TGT)," Morningstar analyst Kimberly Picciola warned in a note Nov. 21. Over the past five years, those two off-mall chains have expanded while J.C. Penney has closed more stores than it has opened. Although Penney plans to increase its square footage over the next five years, it has a lot of ground to cover to catch up, Picciola said.

But Penney has been addressing such challenges by investing in new projects intended to lure in more customers. For example, it has worked in recent months on efforts like introducing the cosmetics chain Sephora in J.C. Penney stores, bringing in a new lingerie brand Ambrielle, and creating new lines with Liz Claiborne. At the same time the company spent money on things like promotions for the holiday season.

Nothing comes for free. Penney's net income amounted to $477 million during the February quarter, down 13.4% compared to the same period last year when the company had benefited from one-time tax credits.

Ullman is also fighting to make his company more efficient. For example, Penney is trying to react more quickly to fashion changes; to accomplish such goals, the company has already doubled its design team over the past two years. Its detailed plan includes choosing a vendor for new software, which the company thinks will cut out the need for back and forth approvals between manufacturers and the company headquarters in Plano. Instead of taking around 50 weeks to design and deliver merchandise to its stores, Penney expects to take around 25 weeks (see BusinessWeek.com, 1/18/07, "J.C. Penney Gets a Markup").

Investors were wary on Feb. 22, when they sold Penney's stock 3.2% to $83.57 per share in afternoon trading on the New York Stock Exchange. The shares slipped from their high of the year on Feb. 21 after rising from their low at $56.66 per share on Feb. 24, 2006. Penney wasn't the only retailer to take hits, either. Abercrombie & Fitch (ANF) shed 2.2% of its value to trade at $80.20 on Feb. 22, after the New Albany (Ohio) clothing retailer yesterday announced a 20% increase in its February quarter profit year over year, but lowered its earnings forecast for the months ahead.

"We see heightened competition for customer dollars in fiscal 2008 (Jan.) limiting JCP's same-store sales growth to low single digits, supported by promotions and aggressive pricing," Standard & Poor's equity analyst Jason Asaeda said in a research note. (S&P, like BusinessWeek.com, is owned by The McGraw-Hill Companies.) S&P reiterated a sell opinion on the stock and cut an estimate on Penney's fiscal 2008 earnings per share by 9 cents to $5.46.

Looking ahead, Penney sees 99 cents earnings per share during the next quarter and $5.44 during the entire year. The consensus estimate had been for $1.05 and $5.42 per share, respectively.

The company promises to increase its sales at department stores open more than a year by the low single digits for both the first quarter and full year.

"In 2007, we will build on what we have accomplished in executing our Long Range Plan strategies, with the primary objective of exceeding our customers’ expectations every time they shop at JCPenney," Ullman said in the press release.