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Penney closing stores
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February 24, 2000: 7:07 p.m. ET
Retailer's 4Q profit falls, missing target; Gap profit up 33%, tops estimate
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NEW YORK (CNNfn) - J.C. Penney Co. announced a $530 million charge related to the planned closing of 40 to 45 department stores and almost 300 drugstores, as it posted disappointing results for the most recent period.
The Plano, Texas-based chain's earnings before the charges fell more than 40 percent in its fiscal fourth quarter, ended Jan. 29. The drop is in stark contrast to other retailers' results, which were buoyed by a strong holiday shopping season to profits gains topping expectations.
For example, clothing retailer Gap Inc. Thursday posted better-than-expected profit for its fiscal fourth quarter, driven by gains at its Old Navy and Banana Republic chains during the strong holiday shopping period. Even with flat same-store sales at its core Gap outlets, the company's profit and revenue grew almost a third from year-ago results.
But at Penney (JCP: Research, Estimates), which fell from fourth to fifth place among the nation's largest retailers last year, the company had little good news in its report. It earned $126 million, or 45 cents a diluted share, excluding special items such as the reorganization charge. Analysts surveyed by earnings tracker First Call forecast earnings of 47 cents a share. In the year-ago period, the company earned $207 million, or 72 cents a diluted share.
Analysts say lower mall traffic hurting company
"Penney's is one of the victims among anchor units in shopping centers that are unable to respond to aggressive competitors encircling the malls," said Bernard Sosnick, an analyst with Fahnestock and Co.
As stores such as Target, Wal-Mart and Kohl's improve the quality of their apparel, they siphon customers from J.C. Penney, Sosnick said.
Sosnick also attributed the sluggish performance of the Eckerd Drug chain to difficulties with shrinkage and integration of the company's information systems. Company officials agreed those results were disappointing.
"Our top line growth was more than respectable," said Frank Newman, chief executive of Eckerd. "Our bottom line growth, however, was not."
Kurt Barnard, president of Barnard's Retail Trend Report, blamed the company's weak earnings on sloppy management and stores that are not appealing to shoppers.
"Whatever they've tried is not working. It's really a matter of how they have tried to do things," Barnard said. "J.C. Penney management is essentially a multi-headed hydra. It's the kind of situation where decisions have been made very, very slowly, and after a decision has finally been made, the need for the decision is gone."
Barnard pointed to Penney's stores, many of which have cluttered aisles, and cited a "cultural morass," in which sales associates present customers with a poor attitude.
"What J.C. Penney needs to do is to make the stores they do have palatable, pleasant to shop, and all of this needs to be done with an eye toward recapturing the market they've lost," Barnard said.
Ditto from Audrey Guskey, a marketing expert at Duqesne University in Pittsburgh. Guskey said Penney's has been unable to transform its image from the old department store that Grandma shopped at to a leading edge store with high-quality, value-priced merchandise.
"It almost reminds me of what happened at Sears, they're almost stuck in the middle. They have top quality merchandise, but it's not value-oriented like Wal-Mart," Guskey said. "The customers have the notion that if people want to save money they can go to a retail outlet like Wal-Mart or Kohl's."
J.C. Penney acknowledges problems
Penney's acknowledges its problems with cluttered stores and marketing issues, but is beginning a restructuring it says will completely revamp the store and help position it to more strongly compete with the likes of Wal-Mart and Target.
Hiring Vanessa Castagna, a former Wal-Mart executive, as Penney's new chief operating officer for stores and catalogs is one major step for the company, spokeswoman Anne Towery said. The company is looking to Castagna to streamline the stores and better market key brands in the stores and catalog.
"...Sometimes you need somebody to hold a mirror up to your face and say, this is what you really look like," Towery said.
Penney's has also hired Paul Papajohn to head up online sales and Steve Farley as the new senior vice president for marketing, Towery said.
"The big thing in front of us is managing the transition," Towery said. "You always have that period of time between when you're rolling up your sleeves and getting to work and when you produce results, and it's tough for us. However, I think we've got wonderful things happening..."
Eckerd sales gain, department stores slip
Penney sales rose 5.2 percent in the quarter to $9.8 billion from $9.3 billion, primarily from its Eckerd drugstore chain, where revenue grew 20 percent to $3.4 billion. Department store sales actually fell 1.6 percent to $6.2 billion.
Special items in the latest quarter resulted in a net loss of $12 million, or 8 cents a share. The charge is from write-down of assets and goodwill from stores that it plans to close. The company will take the remainder of the charge in the current quarter, which will include actual closing costs such as liquidation and severance expenses.
Almost all of the department stores to be closed are losing money, according to James Oesterreicher, Penney's chairman and chief executive. He said most closings will be by the middle of the year, and all will occur by the end of the year.
Despite the Eckerd closings, the company plans to open about 200 drugstores this year, with about 150 of them relocations of smaller existing locations. But relocations are not an option for the 289 drugstore closings covered by the charges, according to Oesterreicher.
The drugstore closings should cut revenue for that division by $450 million this year and about $550 million in future years. But it should not derail plans to create a tracking stock for Eckerd sometime later this year.
Company predicts savings in future
The company said all the closings should save $55 million this fiscal year, and up to $120 million on an annual basis after that. The company said it has also identified $200 million in cost savings, primarily from company-wide procurement.
Officials insist the moves put them in a good position for earnings growth and even predicted they'll exceed current estimates going forward, although they would not give details.
"We believe these estimates are conservative," said Chief Financial Officer Donald McKay in a call to analysts. "Our internal estimates are far more aggressive. However, until we put better numbers on the board, we are not going to lead you to any higher estimates."
For the year, net income came to $336 million, or $1.16 a diluted share, down 43 percent from the $594 million, or $2.19 a share, in the prior year. Revenue rose 6.7 percent to $32.5 billion from $30.5 billion.
Despite the disappointing results, investors were not shaken by Thursday's announcements. Shares of Penney closed down 11/16 to 16-3/16 on the day.
New stores lift Gap earnings
News was much better at clothing retailer Gap (GPS: Research, Estimates), where an aggressive store expansion effort and gains at its Old Navy and Banana Republic chains helped results
The San Francisco-based retailer posted net income of $413.8 million, or 47 cents a diluted share, for the quarter ended Jan. 29, a gain of 32 percent from the year-earlier period. Analysts surveyed by earnings tracker First Call forecast 45 cents a share in the quarter. In the year-earlier period, the company earned $313.9 million.
Sales rose 27 percent to $3.9 billion from $3.0 billion a year earlier. Same-store sales rose 5 percent, down from the 17 percent growth rate by that measure a year earlier. Flat same-store sales at its core Gap and GapKids stores were responsible for the drop. Much of the sales growth came from a 22 percent increase in the number of stores during the year to 3,018, and a 28 percent growth in total square footage of retail space to 24 million.
For the fiscal year, net income totaled $1.1 billion, up 37 percent from $824.5 million in fiscal 1999. Revenue rose 29 percent to $11.6 billion from $9.1 billion, and same-store sales for the year rose 7 percent.
In trading Thursday, shares of Gap (GPS: Research, Estimates) closed unchanged on the day at 42-15/16. 
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