J.C. Penney's two-pronged strategy of closing poor-performing stores and other businesses while focusing more on exclusive merchandise is paying off.
First-quarter net income rose nearly 7 percent, and the department store chain raised its full-year earnings guidance Monday.
The increases suggest that Penney's middle-class customers are still willing and able to spend as they deal with rising prices for gasoline and groceries, even as prices on some clothing rises as well.
Penney has cut costs by closing some stores, outlets and a call center. It is also wrapping up the shutdown of its catalog business.
The company on Monday reported net income of $64 million, or 28 cents per share, for the three months ended April 30. That compares with $60 million, or 25 cents per share, in the same period last year.
Revenue edged up to $3.94 billion from $3.93 billion. Penney's revenue at stores open at least a year rose 3.8 percent, fueled by exclusive brands such as Liz Claiborne, Worthington and MNG by Mango. The gauge is a key indicator of a retailer's health.
Analysts had predicted earnings of 26 cents on revenue of $3.94 billion, according to FactSet.
CEO Myron E. Ullman III promised more cost savings, including trimming marketing expenses and managing inventory more efficiently. The company expects to save about $25 million to $30 million by 2013, with about half of that in 2012.
The company expects $5 per share in earnings for 2014.
The moves came after two opinionated shareholders, William Ackman and Steven Roth, chairman of Vornado Realty Trust, joined the board in January. Ackman's Pershing Square Management and Vornado Realty Trust took large stakes in the company late last year.
Like many department stores, J.C. Penney has been adding exclusive merchandise. Last year, it became the only U.S. retailer to sell Liz Claiborne and Claiborne women's wear, though the Isaac Mizrahi-designed Liz Claiborne New York brand went to QVC. It's also the only department store selling MNG by Mango, a European clothing chain.
During the first quarter, it added 23 Sephora shops inside Penney stores, bringing the total to 254.
Penney has also opened a new unit devoted to finding new revenue streams. As part of this growth initiative, the company opened the first 10 Foundry Big & Tall Supply co. stores — six in the Dallas-Fort Worth area and four in Kansas City. The Foundry website launched in April.
But the department store operator, like many retailers catering to middle-income shoppers, faces uncertainty heading into the second half as shoppers pay more for gasoline and groceries.
During an interview with The Associated Press on Monday, Ullman said that he is already seeing shoppers consolidate their trips to the traditional mall to save on gas. Customer traffic at Penney's stores in traditional malls is "tepid," he said.
Starting this fall, clothing prices are expected to rise because of higher costs for raw materials like cotton. That will intensify competition among retailers.
So far Penney has had "no difficulty passing along cost increases" for its exclusive higher-end fashions, according to Ullman. However, when it comes to lowest-price basics in its stores, its shoppers don't want to pay more. Penney said it was able to take business away from rivals, which raised prices more than it did.
"Some brands increased their prices more aggressively than we did; the gap between their offer and our private-brand offers actually increases, which made our items more attractive," he told investors.
The company, nevertheless, remains cautious, with plans to order 3 percent to 4 percent less merchandise than last year.
For the second quarter, Penney expects revenue at stores open at least a year to rise anywhere from 3 percent to 4 percent.
It expects earnings per share between 20 and 24 cents, including restructuring charges of about 6 cents per share. Analysts predict 22 cents per share, according to FactSet.
The company raised its guidance to a range of $2.15 per share to $2.25 per share. In February, it had forecast a range of $2 per share to $2.10 per share. Analysts had expected $2.09 per share.
Shares fell 3.2 percent, or $1.23, to $37.21 as part of a wider selloff in retail stocks. Richard Jaffe, Stifel Nicolaus analyst, surmised that Penney and other retailers have seen their shares climb ahead of earnings season, and now, given the release of the anticipated good results so far, investors are taking profits.
Penney's shares have risen 15 percent since the beginning of the year. Shares are trading at the high end of their 52-week range of $19.42 to $41.