April 16, 2008 / 12:49 PM / 12 years ago

Penney sees operating income falling this year

NEW YORK (Reuters) - J.C. Penney Co Inc’s (JCP.N) operating income is expected to fall this year, and the retailer may announce more plans to reduce store openings as it reacts to a “dramatic decline” in the overall level of consumer demand, its chief financial officer said on Wednesday.

CFO Robert Cavanaugh, speaking at the retailer’s analyst meeting, also said Penney’s gross margins will be under pressure this year and said he was not prepared to give a specific timeline for reaching the company’s long-range growth targets that it outlined last year.

His comments came after Chief Executive Officer Myron “Mike” Ullman said earlier in the day that he would not provide annual financial forecasts because he did not have enough “visibility” on the full year.

Shares of the mid-tier department store operator fell $1.04 or 2.6 percent to $38.49 in late morning New York Stock Exchange trading.

At its analyst meeting last year, Penney outlined an aggressive 2007-2011 growth plan that included opening 250 new stores over the next five years and predicted a 16 percent compound annual growth rate in earnings per share for 2008-2011.

But since it introduced that plan, the retailer’s sales have taken a hit as its middle-income shoppers contend with higher food and energy costs, a deteriorating housing market, a weakening job market and a credit crunch.

Penney’s sales at stores open at least a year, a key retail gauge known as same-store sales, have fallen every month since November, when it posted a gain of 2.6 percent. It has forecast another decline for April same-store sales.

In February, it cut the number of stores it plans to open this year to 36 from 50.


When Ullman addressed analysts at the opening of the two-day meeting late on Tuesday, he said the retailer would likely need more time to meet its current five-year growth plan.

“I’ve been in the business 39 years. I don’t think I’ve ever seen an environment that was as unpredictable as the current environment,” he said on Tuesday.

Cavanaugh said on Wednesday that the retail sector has seen a dramatic decline in the overall level of consumer demand across the board and with conditions changing both rapidly and with “significant magnitude,” visibility for future periods is limited.

Cavanaugh said the company is reviewing possible further reductions to its store opening plan, and he expects capital expenditures this year of $1 billion, below last year’s level.

Penney President Ken Hicks said that despite the challenging environment, “customers will continue to shop when the merchandise is right.”

He said Penney plans to accelerate the opening of Sephora cosmetic centers within its stores. Penney has 72 Sephora stores within its locations, and he expects that number to grow to almost 300 by the end of 2010.

He also said the retailer will continue to introduce new private brands or expand its current private brand offerings to win more business from shoppers in its stores.

For instance, Penney will expand its Ambrielle underwear brand to include a line for “full-figured” women.

It will also introduce a new home brand, Dorm Life, during the back-to-school season, and it is putting a heavy emphasis on trying to win business from teenage shoppers.

If Penney could get teenagers to shop in its stores, Hicks said Penney would gain “incremental sales” from their parents and siblings.

Ruby Anik, the retailer’s director of brand marketing, said Penney will do more “mobile” marketing — reaching customers on their cell phones.

During the holiday season, Penney sent alerts to shoppers’ cell phones outlining possible gift ideas. Penney also offered customers wake-up calls to get them into stores on the day after Thanksgiving, when its doors opened at 4 a.m.

While customers may change their e-mail addresses, she said they rarely change their cell phone numbers.

“Longer term, we see the cell phone evolving into a handheld computer,” she said. “We see this as an enormous opportunity for communication going forward.”

Reporting by Nicole Maestri; Editing by Brian Moss and Gerald E. McCormick

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