Earnings Preview: J.C. Penney Must Perk Up Sales

Sales and new products will be up for discussion when J.C. Penney (JCP) reports its fourth-quarter and full-year earnings Friday.The department store chain is expected to report a modest drop in earnings for the fourth quarter compared to last year; it has already announced its comparable sales were down 3.6% for the quarter and 5% for the year. Weak sales have plagued J.C. Penney over the last year; even as most retailers posted improved numbers over the holiday season and in January, it lagged. Management blamed its weak January sales figures on a shortage of clearance merchandise, and said sales of regularly-priced merchandise are growing.

Penney's is fighting off competition from an aggressively expanding Kohl's Corp. (KSS) and a resurgent Macy's (M), both of which are expected to report improved results next week. Both Kohl's and Macy's raised their fourth-quarter guidance this month after reporting better than expected January sales.

Analysts will want to hear more details about when Penney's new brand initiatives will kick off and how soon they will start paying off in sales growth. Penney signed a deal to carry the Liz Claiborne brand exclusively starting this year, signed fast-fashion retailer Mango to add in-store shops in 2010, and accelerated the addition of in-store Sephora beauty departments last year.

Private-Label Brands Are a Bright Spot for Sales

Penney's management tweaked its fourth-quarter earnings guidance in January, to between 77 and 82 cents per share, from 70 to 85 cents previously, saying sales had been better than expected. It held to its earlier guidance of $1 to $1.05 for the year. Analysts expect the company to come in at the top end of that fourth-quarter guidance -- 82 cents per share -- which is still down 12.8% from the year-ago period, according to the Thomson Reuters consensus estimate.

Penney's executives say the company has managed to grow its margins and cash on hand thanks to lower costs, more customers buying goods at full price, and rising sales of private-label brands, which bring higher profits than national brands. But investors still want to see some bottom-line sales growth, especially since nearly all department stores are beginning to trend up by that measure. And there will certainly be questions about how Penney's will be able to pull off profit growth with shrinking sales, and when it may run out of places to cut costs.

Just ahead of the earnings report, Morgan Stanley downgraded Penney's stock, concerned that its gross margins seem to have peaked. The stock, which closed Wednesday at $25.88, is still way off the 52-week high of $37.21 it set in mid-October. It has steadily declined from there as Penney's reported down sales during the holiday season. Penney's shares are still rated a buy by a majority of analysts; as Joseph Lazzaro noted recently in BloggingStocks, Penney's is still a solid company, but its stock is more of a long-term play for investors.

After analysts look at the year-end numbers, they'll be asking Penney's management for some clues about how long a term it will be until that play pays off.
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