J.C. Penney Co. said Tuesday that it intends to spin off 20% of its booming Eckerd Drugstore chain and sell off the credit card business of its sagging namesake department store in an attempt to appease investors at a time of less-than-stellar performance.
Investors embraced the news, sending Penney's stock up $4.44 to close at $50.13 on the New York Stock Exchange. But some analysts continued to question the company's ability to resuscitate the ailing JCPenney stores.
In a morning conference call, company executives said cash from the transactions, to be completed by the fourth quarter, would be used to strengthen Penney's balance sheet and further boost its share price. Receipts from the sale of credit card receivables, estimated at $4 billion, would be used to reduce debt, while proceeds from the Eckerd public offering would be used to repurchase shares, executives said. After Tuesday's close, Penney's shares remained 36% below their 52-week high of $78.75.
Penney Chief Executive James E. Oesterreicher touted the Eckerd plan as a way to grant the division new flexibility for acquisitions and other strategic moves as well as increased valuation. Eckerd, the nation's fourth-largest drugstore chain, has not shared in the higher stock prices of its competitors, such as Walgreen and CVS, because it has been bundled with the more volatile department store division, he said.
Oesterreicher said the credit card proposal, which would turn over the division to a third-party provider willing to buy the credit card receivables, will offer customers better incentives and newer technology.
But Oesterreicher acknowledged that the department store division still needs work. Tuesday's announcements included the company's first-quarter earnings, including a 4% drop in net income to $167 million, from $174 million a year earlier.
"What they've done so far are great things to return shareholder value. What's the encore?" said Alan Mak of Arugs Research in New York. "What are they going to do with the department store business? They still haven't solved the question [of] how do we get customers into the store."
Mak said that J.C. Penney continues to use heavy promotions to drive customers into its stores, an indication that there is "not a compelling reason to go to Penney's just yet."
The department stores and catalog had a revenue increase of 0.1% for the quarter ended May 1. Eckerd's revenue was up 18.8%, boosting the parent company's quarterly revenue 7.3% to $7.6 billion from a year earlier.
Although its performance beat analysts' estimates, it was Penney's fourth consecutive drop in quarterly earnings, dragged down by the struggling JCPenney department stores.
"We know we have much to accomplish to achieve our goals [of] recovering the profitability of the department stores and catalog and we are committed to realizing that goal," Oesterreicher said during the conference call. "Our results do not yet reflect the enormous amount of work being done in this area."
J.C. Penney has suffered for more than a year as its stores continue to be squeezed by competition at both ends. Higher-priced department and specialty stores seem to appeal to consumers' fashion needs, while lower-priced discounters such as Wal-Mart Stores have racked up enormous sales with values that appeal to bargain-hunters.
In an interview, Oesterreicher said the stock spinoff is not planned as the first part of a total disengagement.
"It adds to our family of businesses, and we feel it's very important to keep it together," he said.
Analysts said spinning off Eckerd to shareholders allows investors to realize that division's full value, though so-called tracking stocks have not always been a great deal for investors.
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