J. C. Penney Company Inc. (JCP), a leading retailer of apparel and footwear, accessories, fashion jewelry, beauty products and home furnishings, recently delivered better-than-expected first-quarter 2011 results on the heels of improved and exclusive merchandise assortments, and effective cost management. Consequently, the company lifts its full year outlook.

The quarterly earnings of 28 cents a share beat the Zacks Consensus Estimate of 25 cents, and jumped 12% from 25 cents earned in the prior-year quarter.

The Zacks Consensus Estimate had remained stagnant prior to the earnings release despite 4 out of 13 analysts covering the stock revising their estimates upwards and 3 analysts lowering their projections in the last 30 days.

The shares of J. C. Penney rose 5.1% or $1.97 to $40.41 in pre-market trading.

Behind the Headline

The quarterly sales of $3,943 million fell short of the Zacks Consensus Estimate of $3,964 million, and rose marginally by 0.4% from the prior-year quarter. Total sales were adversely affected by the discontinuation of the publishing of Big Book catalogs. Internet sales through jcp.com grew 6.6% to $376 million in the quarter.

Comparable-store sales jumped 3.8% during the quarter. J.C. Penney’s addition of ‘Liz Claiborne’, ‘MNG by Mango’, ‘Call it Spring’, ‘Worthington’, ‘St. John’s Bay’ and ‘Modern Bride’ brands to its portfolio helped drive sales and improve traffic.

The in-store Sephora departments continue to outperform in drawing younger and more affluent customers. During the quarter, J. C. Penney opened 23 Sephora stores, bringing the total count to 254. The Sephora concept is expected to be a significant revenue driver. The company also hinted that ‘MNG by Mango’ and ‘Call it Spring’ brands were now available in approximately 292 and 100 stores, respectively.

The company’s gross profit fell marginally by 2.1% to $1,595 million, whereas gross profit margin contracted 90 basis points to 40.5%. Management now expects second-quarter 2011 gross margin to be flat or marginally up compared with the prior-year quarter.

Other Financial Details

J. C. Penney ended the quarter with cash and cash equivalents of $1,767 million, long-term debt of $3,099 million, reflecting a debt-to-capitalization ratio of 39.5%, and shareholders’ equity of $4,751 million. The company deployed $117 million toward capital expenditures, and generated negative free cash flows of $112 million during the quarter.

Sales and Earnings Forecast

The Plano, Texas-based J.C. Penney guided second-quarter 2011 total sales growth between 0.5% and 1.5% and expects comparable-store sales to rise between 3% and 4%.

Management now expects second-quarter 2011 earnings between 20 cents and 24 cents a share, including restructuring charges of about 6 cents, and fiscal 2011 earnings in the range of $2.15 to $2.25. Earlier, the company had projected full year earnings in the range of $2.00 to $2.10 per share.

The current Zacks Consensus Estimate for the second quarter is 23 cents a share that dovetails with the company’s guidance range. However, for fiscal 2011, the current Zacks Consensus Estimate is $2.11, which is below management’s projection. Following, an increased full year outlook, a positive sentiment may be palpable among the analysts, and we could witness a rise in the Zacks Consensus Estimates in the coming days.

J.C. Penney’s long-term growth target is to achieve earnings of $5.00 per share in 2014, on the heels of compelling private and national brands, redefined jcp.com platform, cost containment initiatives, closure of underperforming units and restructuring of supply chain.

J. C. Penney, which competes with Macy’s Inc. (M) and Kohl’s Corporation (KSS), currently operates more than 1,100 department stores in the United States and Puerto Rico.

Currently, we have a long-term ‘Outperform’ rating on the stock. However, J. C. Penney holds a Zacks #3 Rank, which translates into a short-term ‘Hold’ recommendation.

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