J.C. Penney profit plunges 79%

J.C. Penney Co. said Friday that its first-quarter profit sank 79% because of a big pension expense, but it narrowly beat analysts’ estimates as its expenses fell and demand remained strong for the Sephora cosmetics and American Living merchandise it sells.

Looking ahead, the department store chain said it would miss Wall Street’s full-year forecast because of soft consumer spending and weak mall traffic.

J.C. Penney earned $25 million, or 11 cents a share, for the quarter that ended May 2. That compares with $120 million, or 54 cents, a year earlier. Sales fell 6% to $3.88 billion.

The company is making a payment of $81 million toward pension costs each quarter this year, starting with the first quarter.

Analysts polled by Thomson Reuters, who generally exclude one-time items, on average expected the company to earn 10 cents a share on revenue of $3.88 billion.

Sales at stores open at least a year, known as same-store sales, fell 7.5% as weakness in its fine jewelry business countered strong sales of women’s apparel. Same-store sales is considered a key metric of a retailer’s health because it excludes stores that have opened or closed during the year.

Chairman and Chief Executive Myron E. Ullman III cautioned that the Plano, Texas-based company expects soft consumer spending and mall traffic for the rest of the year.

Ullman, who took the helm in 2004, has planned store expansions and spearheaded initiatives to lure young and trendy customers to its stores. Department stores have been among the retailers hit hardest during the recession as shoppers have focused on necessities such as groceries. Macy’s Inc. reported this week that its first-quarter loss widened, and Nordstrom Inc. posted a 32% drop in quarterly profit Thursday.

J.C. Penney said it would open more Sephora cosmetics counters because their sales are strong. During the first quarter, Sephora opened counters inside 14 JCPenney stores, for a total of 105 at the end of the first quarter. J.C. Penney hopes to host 155 Sephora counters at the end of the year. Sephora is owned by LVMH Moet Hennessy Louis Vuitton.

Meanwhile, J.C. Penney’s president and chief merchandising officer, Ken Hicks, said shoppers were still lining up for merchandise from American Living, an exclusive collection introduced last year that is part of an alliance with Polo Ralph Lauren Corp.

“So far in 2009, American Living is ahead of both last year and our plan in sales and gross margin,” Hicks said on a conference call with analysts.

Looking ahead, J.C. Penney predicts full-year earnings of 50 cents to 65 cents a share. Analysts had expected a profit of 76 cents a share.

The retailer anticipates a second-quarter loss of 15 cents to 25 cents a share and foresees its second-quarter sales dropping 7% to 10%. It had sales of $4.28 billion in the prior-year period, so that implies second-quarter sales of $3.85 billion to $3.98 billion. It predicts same-store sales will fall 9% to 12%.

Shares of J.C. Penney, which operates over 1,000 stores in the U.S. and Puerto Rico, fell 11 cents to $26.54.