J. C. Penney Company, Inc. reported that earnings per share from continuing operations doubled to $0.68 for the fourth quarter and were $1.25 for the full year.
Earnings increased for the sixth consecutive quarter. Fourth quarter earnings were achieved after providing for $83 million in pre-tax charges, which are discussed in Department Stores and Catalog and other unallocated.
Allen Questrom, Chairman and Chief Executive Officer said, “I am proud of the contributions all JCPenney and Eckerd associates are making to our turnaround efforts. Our focus is on strengthening our customer franchise through improved merchandise assortments and more powerful marketing programs that deliver superior value, and an enhanced store environment that improves the shopping experience. Over the past two years, both Department Stores and Catalog, and Eckerd have increased operating profit margin by about 100 basis points per year, which is a significant accomplishment. The Department Store improvement reflects some of the early benefits of a centralized organization and improved customer service. Catalog has implemented major changes in its business model that have increased its contribution to operating profit. Eckerd has successfully implemented many changes in its operations, dramatically improving results.”
Questrom added, “The Company’s financial condition strengthened, with liquidity improvement in 2002. We generated over $500 million of positive free cash flow, substantially better than anticipated. With approximately $2.5 billion in cash investments, or nearly 45% of long-term debt, we have enhanced our financial flexibility as we continue to rebuild our businesses.”
Regarding the outlook for 2003, Questrom further stated, “As we begin the third year of a very complex turnaround we face internal challenges and many uncertain external factors, but we believe that each of our businesses will continue to improve. In Department Stores, we will make progress toward completing our major centralization initiatives, and in Catalog, our focus will be on sales growth. In Eckerd, we will begin to improve our sales performance as we accelerate new store growth. Therefore, we now expect earnings to be in the range of $1.50 to $1.70 per share for the year, with first quarter earnings expected to be in the low $0.30’s per share. The progress we have made over the past two years, during a challenging retail environment, reinforces my confidence that we are on track to achieve our long-term financial goals.”
Department Stores and Catalog Fourth quarter LIFO operating profit increased 35 percent, or 160 basis points as a percent of sales, to $346 million compared with $256 million in last year’s period. Comparable department store sales increased 1.9 percent and were driven by a strong holiday sales performance. Many apparel categories were strong, and Fine Jewelry and Home performed particularly well. Catalog sales decreased 20.7 percent, and results continue to be impacted by lower circulation, a reduction in page counts, and fewer outlet stores, as well as changes to customer payment terms. Internet sales, which are included in Catalog, were strong, increasing 21.4 percent to $138 million in the fourth quarter and were $381 million for the year.
Department Stores and Catalog gross margin increased by 290 basis points as a percent of sales, resulting from better merchandise assortments, the effects of centralization, and inventory management. Gross margin includes a LIFO charge of $6 million in this year’s quarter compared with a $9 million credit last year. SG&A expenses increased as anticipated, from planned investments in advertising and transition costs for the new distribution network, as well as higher non-cash pension expense. In addition, operating expenses include $17 million for severance associated with the closing of store and catalog distribution facilities. Spending in these areas was partially offset by expense savings in store labor, as a result of centralized checkouts and progress made toward eliminating in-store receiving, both of which are a part of the Company’s initiatives to improve customer service.
Other unallocated in this year’s fourth quarter was a charge of $74 million, including $66 million related principally to asset impairments for selected department stores in the United States and Mexico, and catalog facilities. Impairment charges are the result of the Company’s ongoing process to evaluate the productivity of its asset base. Beginning in 2002, the Company no longer reports pro forma earnings, and therefore items such as asset impairments, real estate gains and losses, and restructuring are discussed as components of income from continuing operations.
Additional charges, primarily related to the previously announced restructuring of our catalog operations, are expected to reduce 2003 earnings by approximately $40 million, or $0.10 per share, about evenly divided between the first and second quarters. The Company expects these actions to generate annual savings of about $30 million, or $0.07 per share, which will be fully realized in 2004.
The Company’s financial condition and liquidity strengthened throughout the year. Free cash flow was over $500 million in 2002, and benefited from significantly better operating results, working capital management, and lower than expected capital expenditures. As previously announced, the Company was able to implement and accelerate its funding strategy for its pension plan, and contributed $300 million, or $190 million after-tax, in the fourth quarter. At year-end, cash investments were approximately $2.5 billion, representing about 45 percent of long-term debt. The Company’s strong financial condition will enable it to continue to invest in future growth, improve technology, enhance store environment and provide better customer service.
J. C. PENNEY COMPANY, INC.
and subsidiaries
SUMMARY OF OPERATING RESULTS
-------------------------------------------
(Amounts in millions except per share data)
13 weeks ended 52 weeks ended
---------------------- ------------------------
Jan. Jan. Jan. Jan.
25, 26, Inc. 25, 26, Inc.
2003 2002 (Dec.) 2003 2002 (Dec.)
------- ------- ------ -------- -------- ------
Comparable store
sales gains
Department stores 1.9% 4.0% 2.6% 3.3%
Eckerd drugstores 2.5% 5.7% 5.2% 7.8%
Total retail sales
Department stores
and catalog $5,765 $5,880 -2.0% $17,704 $18,157 -2.5%
Eckerd drugstores 3,784 3,662 3.3% 14,643 13,847 5.7%
------- ------- -------- --------
Total 9,549 9,542 0.1% 32,347 32,004 1.1%
Margins and expenses
--------------------
Gross margin - LIFO
Department stores
and catalog 1,955 1,823 7.2% 6,355 6,102 4.1%
Eckerd drugstores 929 838 10.9% 3,419 3,113 9.8%
------- ------- -------- --------
Total 2,884 2,661 8.4% 9,774 9,215 6.1%
Selling, general and
administrative
(SG&A) expenses
Department stores
and catalog (1,609) (1,567) 2.7% (5,660) (5,554) 1.9%
Eckerd drugstores (769) (752) 2.3% (3,007) (2,905) 3.5%
------- ------- -------- --------
Total (2,378) (2,319) 2.5% (8,667) (8,459) 2.5%
Segment operating
profit - LIFO
Department stores
and catalog 346 256 35.2% 695 548 26.8%
Eckerd drugstores 160 86 86.0% 412 208 98.1%
------- ------- -------- --------
Total 506 342 48.0% 1,107 756 46.4%
Other unallocated (74) (23) 100.0%+ (93) (46) 100.0%+
Net interest expense (97) (101) -4.0% (388) (386) 0.5%
Acquisition
amortization (1) (17) (48) -64.6% (42) (121) -65.3%
------- ------- -------- --------
Income from
continuing
operations
before income tax 318 170 87.1% 584 203 100.0%+
Income taxes (116) (75) 54.7% (213) (89) 100.0%+
------- ------- -------- --------
Income from
continuing
operations 202 95 100.0%+ 371 114 100.0%+
------- ------- -------- --------
Gain/(loss) on sale
of discontinued
operations, net of
tax -- -- N/A 34 (16) N/A
------- ------- -------- --------
Net income $202 $95 100.0%+ $405 $98 100.0%+
J. C. PENNEY COMPANY, INC.
and subsidiaries
SUMMARY OF OPERATING RESULTS
-------------------------------------------
(Amounts in millions except per share data)
13 weeks ended 52 weeks ended
---------------- ------------------
Jan. Jan. Jan. Jan.
25, 26, 25, 26,
2003 2002 2003 2002
------ ------ ------- -------
SEGMENT FINANCIAL DATA:
----------------------------------
Department stores and catalog
Ratios as a % of sales:
FIFO gross margin 34.0% 30.9% 35.9% 33.6%
LIFO gross margin 33.9% 31.0% 35.9% 33.6%
SG&A expenses 27.9% 26.6% 32.0% 30.6%
Segment operating profit 6.0% 4.4% 3.9% 3.0%
LIFO charge/(credit) $6 $(9) $6 $(9)
Depreciation and amortization $92(1) $88 $368(1) $370
