Just in Time for Christmas!

11/10/2006 12:00 am EST

Focus:

Richard Moroney

Editor, Dow Theory Forecasts

Richard Moroney has his hand on the pulse of the market. His comprehensive analysis often highlights potential opportunities as a result of changing industry and company trends. Here, he takes a fresh look at an old stalwart.

"J.C. Penney (JCP NYSE) shares floundered in 1999, and weak operating results kept the stock under $30 from 2000 through 2003. But a large divestiture, a change in focus, and numerous efficiency improvements have sparked strong results in recent quarters.

"In the six months ended July, department-store sales rose more than 4%, with same-store growth of 3.9%. Per-share profits rose 56% to $1.65. Here are five reasons for investing in these Buy- and Long-Term Buy-rated shares:

"Penney plans to open 28 new stores in fiscal 2007 and 50 in fiscal 2008, boosting total square footage by about 3% annually. Expansion plans represent a departure from past strategies, focusing on one-level, offmall formats that generate higher sales per square foot and more frequent customer visits than traditional mall-based stores.

"Private brands account for more than 40% of sales and yield gross margins 3-5% higher than national brands. Penney offers more than 25 private brands. In spring 2007, Penney plans to launch the Ambrielle brand, which will become the centerpiece of its redesigned lingerie offerings. The company is also beefing up its portfolio of national brands, with exclusive Liz Claiborne lines of casual clothing set for launch next spring.

"Penney's target market consists of middle-class households with incomes of $35,000 to $85,000. The company draws new customers through prime-time television advertising. Penney ads reached 90% of US women aged 18 to 54 about 16 times over a four-week period last spring.

"Penney's strong brand recognition and pre-existing catalog infrastructure represent competitive advantages that help drive strong Internet sales. jcp.com is Penney's fastest-growing sales channel, attracting more than 450,000 visitors per day.

"Traditionally, Penney has averaged a cycle time-the period from initial product concept through delivery of merchandise to the store- of about 50 weeks. But Penney has cut some of its cycle times drastically, with a company wide goal of about 25 weeks. The benefits include higher frequency of new merchandise in stores and higher profit margins. Operating profit margins reached 10.7% over the last 12 months, up from 9.8% over the same period a year earlier. As the holiday-shopping season approaches, business is heating up. Same-store sales rose 10.2% in September, and the company is raising profit estimates. Consensus estimates project per-share-profit growth of 27% in fiscal 2007 and 12% in fiscal 2008. Penney trades at 16 times projected fiscal 2007 earnings, a substantial discount to the average large department store."

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