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J.C. Penney Halves Q1 Loss, Raises Full-Year Guidance

J.C. Penney C0. (JCP) announced mixed sales results for its first fiscal quarter after the close of markets yesterday, causing ripples of concern about the retailer’s turnaround efforts and sending the stock down by as much as 8 percent in early morning trading.

However, the mid-tier department store retailer raised its full-year financial guidance, encouraged by signs that its customers are coming back, and seeing greater opportunity to gain share of their discretionary spending.

Net sales of $2.86 billion increased 2 percent from the $2.8 billion posted in the first quarter of 2014, in line with expectations. Same store sales increased 3.4 % for the current year period, missing Wall Street forecasts of a 3.5% increase.

Women’s apparel, men’s and home goods were the company’s top performing merchandise divisions in the quarter. On the quarterly earnings conference call, management told analysts that men’s and women’s apparel, which represents more than half the total business, has regained much of the volume loss suffered after 2011 during the botched repositioning attempt led by former CEO Ron Johnson, and that children’s is growing nicely.

Sephora Inside J.C. Penney, now available at 515 locations, also continued its strong performance. Geographically, all regions experienced sales growth when compared to the same period last year with the best performance in the western and central regions of the country.

Easter was reportedly strong across the board for the retailer, with apparel gaining significant momentum. The shift of some of the days leading up to Mother’s Day into the second quarter also impacted first quarter sales, but will help in the current quarter.

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Gross margin improved 330 basis points to 36.4 % of sales, compared to 33.1 % in the same quarter last year.

SG&A expenses for the quarter were down $44 million to $965 million or 33.8% of sales, representing a 220 basis point improvement from last year. These savings were primarily driven by lower store controllable costs, advertising and improved credit income.

Operating income for the quarter improved to a loss of $75 million from a loss of $247 million last year. The company incurred a net loss of $167 million, or $0.55 per share, a 52% improvement over last year’s loss of $352 million, or $1.15 per share.

Long-term debt increased from $4.8 billion from the first quarter of last year to $5.3 billion this year.

CEO Mike Ullman, III, said in a statement, “We are pleased with the company’s solid performance this quarter across all key metrics…This year we are switching gears, going on the offensive to gain back share and grow our business profitably while executing our vision to become the preferred shopping choice for Middle America.”

President and CEO-designate Marvin Ellison, who will take the reins in August, said, “The teams executed extremely well this quarter, resulting in significantly improved performance across the enterprise. It is clear that our strategic initiatives are working to drive profitable sales growth. Our exceptional customer experience, when combined with our strength in private brands, national brands and points of differentiation like Sephora Inside J.C. Penney and the Disney Collection, give us confidence in our ability to earn customer loyalty and deliver on our long term goals.  In fact, based on our results to date, including a strong Easter and Mother’s Day, we feel confident in raising our 2015 expectations for sales, gross margin and SG&A.”

Ullman told analysts on the earnings call that J.C. Penney is back to the 87 million active customers it had in 2011, but is failing to sell them the breadth of product categories it did before. There is opportunity to sell more accessories, footwear and other key categories to this diverse customer base, he feels.

Based on the momentum from the first quarter, the company increased its 2015 full-year guidance. It now expects comparable store sales to increase 4 percent to 5 percent versus 3 percent to 5 percent previously. Gross margin is expected to improve 100 to 150 basis points up from 50 to 100 basis points previously.