JCPenney Fourth Quarter Earnings Double; Operating Profits for Department Stores and Eckerd Increase Significantly

Business Wire, Feb 20, 2003

Business Editors

PLANO, Texas--(BUSINESS WIRE)--Feb. 20, 2003

Financial Condition Strengthens, Cash Flow Exceeds $500 Million

J. C. Penney Company, Inc. (NYSE:JCP) today 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.

Eckerd Drugstores

Fourth quarter LIFO operating profit increased by 86 percent, to $160 million compared with $86 million last year. Operating profit margin increased by 180 basis points to 4.2 percent of sales. Improvement in Eckerd's operating profit resulted from a combination of increased gross margin and leveraging of SG&A expenses. Comparable store sales increased by 2.5 percent during the quarter, with pharmacy sales increasing 5.0 percent, and non-pharmacy, or front-end sales decreasing 2.1 percent. Pharmacy sales were negatively impacted by approximately 400 basis points from the effects of higher generic dispensing rates and other changes in branded drugs, and the continued effects of a difficult consumer environment. The strongest front-end categories for the quarter were household products, beverages, seasonal items and over-the-counter products.