Reorganization costs, slow sales biting hard
J.C. Penney Co.'s profits fell in the first quarter as the company's department store sales continued to decline and the Eckerd drugstore chain posted lower operating earnings, the retailer said Tuesday.
Plano-based Penney reported a net loss of $118 million, or 48 cents per share on a diluted basis, in the quarter that ended April 29, compared with net income of $167 million, or 61 cents per share, in the year-ago quarter, which had no charges.
The loss includes pretax, one-time charges of $324 million, or 76 cents per share. That covers Penney's previously announced restructuring moves, which include closing 40 department stores and 289 Eckerd stores, centralizing buying operations for the department stores and paying severance to about 900 employees who are losing their jobs.
Excluding the one-time charges, the company earned 28 cents per share, which exceeds the 23 cents per share average estimate of analysts surveyed by First Call-Thomson Financial.
Total company revenue increased 2.6 percent to $7.73 billion from $7.53 billion a year ago.
Penney's department store and catalog sales declined 2.4 percent to $4.1 billion from $4.2 billion. Same-store sales, or sales from stores open at least a year, were down 3.1 percent in the quarter.
Vanessa Castagna, Penney's chief operating officer, said a meaningful pickup in sales isn't expected until the first quarter of 2001. Operating profits from J.C. Penney stores and catalog sales increased to $167 million from $145 million last year.
"We're changing the fundamentals," Ms. Castagna said. "We're in a long-haul process."
She has been making the sales floors seem more spacious, which, she said, were too cluttered. "If you've been in one of our stores lately, you'll see there are 30 inches between our racks," Ms. Castagna said.
Penney also recently hired DDB Worldwide to produce a new advertising campaign that is expected to begin this fall.
And in August, Ms. Castagna said, the company will begin implementing its new buying system in women's and men's casual sportswear.
"We believe J.C. Penney is making progress as expected, but there is still a lot of work to do," said Jeffrey Edelman, retail analyst at PaineWebber in New York.
Department store results benefited from Ms. Castagna's initiatives, which also include building closer relationships with suppliers, he said.
Eckerd sales were up by 9.4 percent to $3.3 billion and same-store sales rose 6.9 percent.
The drugstore chain's operating profits declined to $30 million (including $78 million in one-time charges) from $129 million last year.
Don McKay, Penney's chief financial officer, said the company still plans to spin off Eckerd's tracking stock in the second half of the year.
Direct Marketing Services, which Penney put up for sale last month, had first-quarter operating profits of $60 million versus $55 million last year. Its revenue increased 5.1 percent in the quarter.
Internet sales in the first quarter were $47 million, compared with $6 million in the same period last year. Ms. Castagna said the company is raising its online sales forecast for the year to $280 million from its previous estimate of $260 million.
Last year, Penney's online sales were $102 million.
The company recently launched its Just 4 Me women's specialty-size Web site.
So far, the site has a 16 percent conversion rate, meaning 16 percent of visitors made purchases, which is high for the industry.
Penney's stock price dropped 38 cents Tuesday to close at $18.38 in trading on the New York Stock Exchange.