J.C. Penney Earnings Drop 51%

By KAREN TALLEY

J.C. Penney & Co. reported a 51% drop in fourth-quarter profit on weak margins and sales, and the department-store chain indicated its woes will continue in a tough retail environment.

For the current quarter, the company said it expects a loss of 20 cents to 30 cents a share, with revenue falling 10% to 13%. Analysts surveyed by Thomson Reuters expected a loss of 19 cents on a 9% drop in revenue.

Bloomberg News

Shoppers enter a J.C. Penney store in Queens, New York. Penney, whose profit fell on weaker margins and sales in the fourth quarter, expects tough retail conditions to continue this year.

Traffic in shopping malls remains in a deep slump, and while Penney is doing better than other mall retailers, getting shoppers to make purchases hasn't been easy, J.C. Penney Chief Executive Officer Myron Ullman III said.

"The customer is very tentative, they are buying what they need and they are being smart about how they spend their money," he told analysts on a conference call to discuss the company's quarterly results.

For the period ended Jan. 31, J.C. Penney posted net income of $211 million, or 95 cents a share, down from $430 million, or $1.93 a share, a year earlier. Gross margin fell to 34.6% from 36.2% as the company increased promotions during the holidays.

J.C. Penney said three weeks ago that the quarter's revenue fell 9.8% to $5.76 billion. Women's apparel and family shoes were the best-performing segments, while fine jewelry was the worst. The Plano, Texas, company said it performed best in the Southwest and worst in the Southeast. Sales at stores open at least a year slid 11%. In the current quarter, it expects same-store sales to fall by 12% to 15%.

The company's gross margin fell to 34.6% from 36.2% in the fourth quarter as it increased promotions during the holidays. However, management has been taking steps to blunt the impact of the consumer-spending downturn, analysts said.

Uta Werner, retail analyst at Sanford C. Bernstein & Co., said J.C. Penney has been "tightly managing expenses over the past year, including a heightened focus on store productivity, balancing the need for ongoing customer service and traffic-driving advertising spending with expense reductions in other areas."

Coming into its new fiscal year, which began on Feb. 1, the chain is also in a much better position in terms of excess merchandise, with inventory down 13.5% on a comparable-store basis, executives said.

J.C. Penney is also trying to pick up customers from doomed competitors, like Mervyn's, Goody's Family Clothing and Linens N' Things. The company said it is working with vendors to make sure that popular items at those retailers are in stock at its own stores.

"We've seen success in recruiting those customers to our format when we were [competing] head-to-head with those stores," Mr. Ullman said.

In the year ahead, J.C. Penney faces not only lower sales volume, but also higher noncash pension expenses. And last month, J.P. Morgan said the retailer was in danger of violating covenants on its revolving credit line.

But the company says its cash position is solid. So, while J.C. Penney is in the process of negotiating a new revolver, "if banks extract unfair terms we don't need one," Mr. Ullman said during the call.

—Kerry E. Grace contributed to this article.

Write to Karen Talley at karen.talley@dowjones.com

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