May 15, 2008
As any runway model can attest, being a slave to fashion has its upside. On the flip side, being a slave to a weakened consumer environment is no fun at all, and happens to be where J.C. Penney (NYSE: JCP ) finds itself these days. Despite the challenging near-term climate, on Thursday morning Penney's posted first-quarter earnings of $0.54, firmly ahead of analyst projections.
J.C. Penney may have beat earnings expectations, but net income fell a dreary 49.6% as total sales decreased 5.1% and same-store sales dropped 7.4% (although management said that figure fell at the "better" end of the decline in high single digits that it had expected). It's like every other retailer that's struggling with consumers squeezed by skyrocketing energy prices, which makes it hard to sell discretionary items. Fellow Fool Tim Otte warned us back in February about massive sales he had seen in the stores. His observations proved pertinent, as the company used heavy markdowns to help drive sales, sending the gross margin down 150 basis points.
I think J.C. Penney is properly managing its business by hunkering down until consumers start shopping again. Management cited plenty of "financial flexibility" that enables it to continue delivering a highly compelling shopping experience. New brands such as Decree, Fabulosity, and Dorm Life are being rolled out, and J.C. Penney recently introduced the American Living apparel brands with partner Ralph Lauren (NYSE: RL ) , which has promise as many derivations of the Ralph Lauren brand, be it Chaps at Kohl's (NYSE: KSS ) or the namesake apparel at Macy's (NYSE: M ) and Dillard's (NYSE: DDS ) .
J.C. Penney shares are up today because of the stronger-than-expected earnings. The company is still calling for sales to fall in the low single digits and comps to decline in the mid-single digits. But it should be able to ride out a tough retailing environment -- I'm even hearing rumblings that recession fears have subsided lately, which would be welcome news for many retailers.