J.C. Penney Hypes Holidays

"We feel very confident about this Christmas," Robert Cavanaugh, J.C. Penney's executive vice president and CFO, told investors during yesterday's earnings call. "With the programs we have in place, we will have a successful holiday."

The good news for earnings and outlook overshadow the corporation's top executive changes as it transitions from a holding company into an operating company. As most countdown to Christmas, the J.C. Penney hierarchy is counting down the days, 13 to be exact, before Mike Ullman takes the CEO keys from Allen Questrom. A second executive shift, announced last Friday, is the exit of the second-in-command, Vanessa Castagna, who stepped down after four years when she was passed over for Questrom's job.

Questrom belittled the industry rumor mill that more are walking out Penney's door. "I do not believe that you're going to see a turnover group," he said, adding 95% of the force are longtime company employees. "There's been a lot of talk about people leaving. It's all malarkey. I think you'll see many of the same faces next year."

Questrom also nipped any speculation about Ullman's health, which is rumored to be multiple sclerosis and is in fact "a microscopic spinal cord injury." He says the J.C. Penney succession team queried Ullman's doctors. The fact is that Ullman has lived with the problem for 17 years and uses a Segway to get around. "His mind isn't affected," emphasized Questrom, who said he will remain in place for the transition "as long as he (Mike) believes is necessary."

Ullman is slated to make his first appearance at the next analysts meeting, just as the switch to an operating company heads into the final stretch. "We knew we would have to change from a holding company structure to an operating structure," Questrom said about a plan that's been four years in the making. "It will occur over the next few months."

The top-tier corporate shift will cost 5 cents to 6 cents per share or about $26 million on a pre-tax basis for a one-time charge. About $3 million each is allocated for Castagna and Ullman, who starts a long-term incentive ticking in February 2005, and the balance covers Questrom's exit.

Of particular note in the earnings call is the performance level of the chain's nine off-market stores. The freestanding units are outperforming their counterparts to such a degree that J.C. Penney will add 13 more as part of a 20-store plan for 2005. In the "next few years," the retailer expects to have 75 to 100 off-mall shops open and is eyeing more than 200 over the long term, said Ken Hicks, executive vice president and COO, who temporarily will take over Castagna's duties to lead the stores, catalog and Internet divisions.

According to Questrom, the chain's stores will top out at $150 per sf in sales this year versus the prior year's $120 per sf. Off-mall stores, he says, are generating $200 per sf. At last count, the chain operated 1,020 stores in the US and Puerto Rico and 61 Renner shops in Brazil.

The third-quarter results logged a 66% increase in operating profit, now totaling $346 million versus $208 million in Q3 2003. Earnings from continuing operations were 50 cents per share in comparison to 31 cents per share at last year's Q3 close.

To date, J.C. Penney has spent about $1 billion to buy back 27.6 million shares. Cavanaugh says the capital repositioning plan is about one-third complete "and we expect to complete the share repurchasing in six to nine months." To date, $1.7 billion in debt has been shaved, with the Q3 close standing at $4.6 billion in long-term obligations.

In the third quarter, J.C. Penney has paid $600 million to the IRS for taxes arising from the Eckerd Corp. Another $200 million will be paid in January 2005.