In an effort to tackle the tough retail environment, department stores operator J.C. Penney Co., Inc. (JCP) Wednesday said it would reduce new store openings and renovations in the year ahead, and stay focused on controlling inventory levels and operating expenses.
Updating its Bridge Plan, the Plano, Texas-based company expects the coming year to remain very challenging for the American consumer. As a result, JCPenney's plans for 2009 include a reduction in capital expenditures to nearly $650 million, compared to $1 billion expected for 2008 and $1.2 billion in 2007.
The Bridge Plan is aimed at allowing the company to successfully navigate the current environment, to maintain strong financial flexibility and to benefit when conditions improve.
The company will open 20 new or relocated stores in 2009, down from 36 new or relocated stores that will open in 2008. J.C. Penney previously planned 50 new store openings each year through 2011.
Among the stores that will open in late 2009 is the company's first store in Manhattan, which is expected to be its highest sales volume location.
The company has also reduced its renovation plans to 10-15 stores in 2009, down from the previous plans to renovate 65 stores each year through 2011. The company expects to complete 20 renovations in 2008.
By the end of the 2008 back-to-school season, JCPenney continues to project total inventories to be below 2007 levels.
According to Myron Ullman, III, J.C. Penney's Chairman and Chief Executive Officer, "We believe the combination of our merchandising, marketing and pricing programs, together with our prudent capital expenditure plans will allow us to minimize the impact of the difficult retail environment and improve both our competitive positioning and market share."
J.C. Penney, the third-largest U.S. department-store chain, will continue to plan inventory levels in line with sales expectations. With better inventory alignment in the second half of 2008, J.C. Penney continues to expect year-over-year gross margin trends to improve in the third and fourth quarters.
Though operating expenses will be managed carefully, ratios are expected to remain under pressure from increases associated with new stores as well as lower sales levels.
With a surge in gasoline prices and food costs, people are cutting down their expenses, focusing mostly on essentials. With dispensable income on the decline, spending on accessories and embellishments has taken a back seat, creating a tough environment for retailers.
Hurt by the weak economy, the company reported a sharp fall in its first-quarter profit, owing to lower sales and comparable store sales. JCPenney's woes were shared by peers Macy's, Inc. (M) and Kohl's Corp. (KSS). Macy's reported a first-quarter loss, while Kohl's first quarter profit declined from the previous year.
The depressing sales trend continued for the company into May also, with JCPenney reporting a 2.4% decrease in total sales and 4.4% decrease in its comparable store sales for the month.
Deutsche Bank Monday upgraded J. C. Penney's shares to "Buy" from "Hold" and raised its price target to $46 from $45. The brokerage raised its 2008-second quarter earnings per share estimate to $0.40 from $0.38, its 2008 estimate to $3.33 from $3.32, and its 2009 estimate to $3.54 from $3.52.
Analyst Bill Dreher Jr. attributed the upgrade to sales trends and valuation. The analyst believes recent sales trends have improved at the department stores as indicated by several channel checks & the ISI survey. The analyst finds JCP valuation levels are particularly attractive and recommends purchase of JCP shares as a value story, with a compelling risk/reward profile.
JCP is currently trading at $38.23, up $1.35 or 3.66%, on 5.04 million shares. For the past year, the stock trended in the range of $33.27-$76.99.
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