A Penney Saved

A penny saved is a penny earned, right? Apparently, that's the strategy for retailer J.C. Penney (NYSE: JCP). Last Thursday, the company announced that it will eliminate 475 jobs and take a $20 million charge ($0.04 a share) in its fiscal Q4.

The cost-cutting actions are part of J.C. Penney's plan to reduce expenses by more than $200 million a year in its department store, catalog, and Internet businesses.

The company will continue cutting costs over the next several years, targeting annual savings of $100 million. In 2004, J.C. Penney looks to save roughly $50 million.

The retailer is trying to maximize efficiency and centralize more of its operations. In the fiscal second quarter, it will turn out the lights of its Austin, Tex.-based telemarketing centers. Penney will then reroute all call volume to other centers and eliminate unnecessary store support centers, moving this service in-house. The company is also cutting marketing expenditures and other overhead costs where it can.

The impetus for the cost-cutting plan has been brought on by two major factors: the continued overall retail competition from discounters such as Wal-Mart (NYSE: WMT) and Target (NYSE: TGT), and the chronic underperformance of J.C. Penney's Eckerd drugstore chain.

J.C. Penney has been struggling to keep pace with low-cost retailers throughout the economic downturn, and its sales growth has stagnated. In its last fiscal year, Penney achieved less than 1% overall sales growth, and the trend is expected to continue when Q4 results are announced next month.

As for Eckerd, the retailer made no mention of the possible sale, merger, or spin-off of the chain, but it's clear that Eckerd has been a real thorn in J.C. Penney's side. In its most recent quarter, Penney's operating income from its department stores increased 22% to $207 million. During the same stretch, Eckerd's operating income took a 57% nosedive, from $79 million to $34 million.

Penney is still on track to meet its Q4 profit target of $0.80 a share, and the company has made progress over the past year to compete more effectively with its discount rivals. If it can achieve the desired cost savings, and finally figure out a plan to rid itself of all or part of Eckerd's, investors who've been rewarded with a share-price rise from $15.57 to current $26 levels over the past year may be rewarded by Penney yet again.

Jason Matthews remembers getting dressed up in penny loafers bought from J.C. Penney as a kid. He welcomes your feedback at jasonhmatthews@yahoo.com.