J. C. Penney Company, Inc. reported total net sales increased 3.1% to $4.35 billion for the first fiscal quarter ended May 5, compared to $4.22 billion in the year-ago period. Operating income improved 60 basis points to 9.6% of sales, driven by improvement in gross margin and SG&A expense leverage. Income from continuing operations for the quarter increased 11.7% to $238 million, while earnings per share increased 15.6% to $1.04 per share from 90 cents per share in last year’s first quarter.

Total department store sales increased 4.4% for the first quarter, which reflects 32 new or relocated stores opened subsequent to first quarter last year, including seven stores opened in this year’s first quarter. Comparable store sales increased 2.2% and were in line with the company’s guidance for a low-single digit increase, despite a challenging retail environment for much of the quarter. The strongest merchandise results were in women’s apparel, fine jewelry and women’s accessories, with continued softness in home categories such as furniture and window coverings. All regions of the country generated sales gains in the first quarter, with the best performances in the northwestern and southwestern regions. Internet sales through www.jcp.com increased approximately 18% on top of a 22% increase in last year’s first quarter, while total Direct sales, including print and outlet stores, decreased 3.6%.

Gross margin improved by 70 basis points to 41.5% of sales, which reflects good customer response to spring merchandise assortments, especially private apparel brands, continued benefits from the company’s planning and allocation technology and processes, and initial benefits from the company’s cycle time reduction initiative. SG&A expenses were leveraged by 20 basis points to 29.7% of sales. Including the impacts of depreciation and amortization expense, pre-opening expenses and income from ongoing real estate operations, total operating expenses were 31.9% of sales in the quarter. First quarter operating income was $419 million, a 9.7% increase from last year’s $382 million.


Second Quarter Earnings Guidance

The following second quarter guidance is based on management’s expectations as of May 17, 2007:

  • Due to last year’s 53rd week, second quarter sales will vary by month from last year’s sales pattern, with a significant benefit expected in the July period due to an additional week of Back-to-School sales.

  • Total department store sales: increase mid- to high-single digits.
  • Comparable department store sales: increase low- to mid-single digits.
  • Direct sales: decrease low- to mid-single digits.
  • Operating income margin: as a percent of sales, operating income is expected to show continued year-over-year improvement, primarily due to higher gross margin.
    Interest expense: approximately $37 million.

  • Bond premiums and unamortized costs: a charge of $12 million, or $0.03 per share, related to the early redemption of the company’s 8.125% Debentures due 2027.
  • Income tax rate: approximately 38.5% for the quarter compared to a 28.2% rate last year. Last year’s second quarter benefited from $26 million of tax credits, or 11 cents per share.
  • Average diluted shares: approximately 226 million average diluted shares of common stock, including about three million common stock equivalents.
  • Earnings per share: approximately 77 cents per share in the second quarter, including the impact of thre cents per share for costs associated with the early redemption of debt. Second quarter earnings per share are consistent with initial expectations for the quarter included in the company’s full year guidance. Incorporating the positive variance from initial guidance for the first quarter, full year earnings per share from continuing operations are now expected to be in the area of $5.49 per share, an increase of five cents per share from previous guidance.