NOVEMBER 12, 2010, 11:58 A.M. ET.UPDATE:

JC Penney 3Q Profit Rises 63% After 2009 Charges

By Karen Talley
Of Dow Jones Newswires

NEW YORK (Dow Jones)--J.C. Penney Co.'s (JCP) third-quarter earnings rose 63% as the department-store operator benefited from fewer charges, but high merchandise levels and indications of poorer profits from the products it sells raised eyebrows.

The retailer also saw the slightest rise in sales of its two major competitors, Macy's Inc. (M) and Kohl's Corp. (KSS), which reported their own results earlier this week, and blamed unseasonably warm weather in the north part of the U.S. for the sluggishness.

But Chief Executive Myron Ullman said in a call with analysts that conditions had greatly improved in November, which was "off to a great start." J.C. Penney is also well positioned for the holiday season, with compelling products and initiatives like a new mobile commerce site that was launched this week, Ullman said.

But total inventory was up 6.2% going into the fourth-quarter holiday period, which analysts said looked high given the small 0.2% increase in sales during the prior period. The amount of merchandise was also deemed heavy given J.C. Penney's 3% to 4% fourth quarter comparable-store sales growth expectation and overall sales projection of 1.5% to 2.5% growth.

During the most recent quarter J.C. Penney also saw its gross margin, which gauges how much profit is derived from sales, fall to 39% from 40.6%.

Ullman said much of the decrease was due to discontinuing the company's Big Book catalogs, promotional activities during the quarter and in part to a shift in merchandise mix to emphasize more lower-costing items.

The third-quarter results were "low quality," said Morgan Stanley analyst Michelle Clark, who also said J.C. Penney's fourth-quarter outlook for same-store sales and gross margin "could prove optimistic."

Ullman himself, while confident of J.C. Penney's positioning, did say as the company enters the holiday season, it expects the environment to remain "highly promotional." The condition could further eat at margins.

Other merchandising initiatives are paying off in a significant way, Ullman said, citing the third quarter launch of the Liz Claiborne Inc. (LIZ) brand and expansion of Sephora in-store cosmetic boutiques.

Penney has been striving to turn itself around and fend off rivals like Macy's and Kohl's, which have designs on its frugal customer base. Pressure for Ullman to turn the retailer around has increased in recent months as activist investor William Ackman's Pershing Square Capital Management and Vornado Realty Trust recently jointly amassed a stake of more than 26% in Penney.

Penney -- which offers a wide range of moderately priced merchandise -- expects a lot of its growth to come from expanding such initiatives as Sephora cosmetics boutiques and increasing distribution of its exclusive brands, such as MNG by Mango and Liz Claiborne.

J.C. Penney on Thursday said it is setting up a unit to focus on specialty brands, in an expansion beyond its namesake department stores.

For the quarter ended Oct. 30, the company reported a profit of $44 million, or 19 cents a share, up from $27 million, or 11 cents a share, a year earlier. The company in August projected 16 cents to 20 cents, below analysts' views at the time.

Excluding pension expenses and real-estate impacts, earnings rose to 34 cents a share from 30 cents.

Operating costs fell 4.9%.

Total sales edged up 0.2% to $4.19 billion, while same-store sales rose 1.9%. Shoes and men's apparel were the strongest categories.

For the fourth quarter, Penney expects earnings of 90 cents to $1 a share on revenue growth of 1.5% to 2.5% and same-store sales growth of 3% to 4%. Analysts polled by Thomson Reuters recently projected earnings of 94 cents a share and 2% revenue growth to $5.64 billion.

Shares of Penney, which confirmed its earnings guidance for the year, were recently off 2.1%, to $31.54.

-By Tess Stynes, Dow Jones Newswires; 212-416-2481; Tess.Stynes@dowjones.com

-By Karen Talley, Dow Jones Newswires; 212-416-2196; karen.talley@dowjones.com

http://online.wsj.com/article/BT-CO-201 ... 12893.html