A higher effective tax rate contributed to lower fourth-quarter earnings at JC Penney, and conservative first-quarter guidance added to investor anxiety on Thursday (22 February).

Net income for the three months ended 3 February dropped 13.4% to US$477m, or $2.09 a diluted share, from $551m, or $2.34, in the year-ago quarter. Earnings from continuing operations rose to $2.00 a diluted share, 4 cents above the analyst consensus estimate.

Net sales were up 7.4% to $6.66bn during the 14-week quarter from $6.2bn in the prior year's 13-week period. On a 13-week basis, comparable department store sales rose 2.2%.

While operating profit increased 13.2% to $756m, income tax expense skyrocketed 51.4% to $271m, severely denting the bottom line. The company reaped substantial benefits from nonrecurring tax credits during the earlier year, complicating comparisons.

Investors traded shares of Penney's down $2.96, or 3%, in New York Stock Exchange trading Thursday. They closed at $83.39 with much of the selling apparently inspired by Penney's forecast for the current first quarter.

Although the Plano, Texas-based retailer lifted full-year earnings expectations to $5.44 a diluted share, Penney's said it expects about 99 cents in EPS during the first quarter, about 6 cents below analysts' earlier estimates. Department store same-store sales are projected to be in the low-single digit range for both the quarter and year.

A number of analysts pointed out that Penney's management tends to be conservative by nature, with Citigroup's Deborah Weinswig suggesting that the stock market's reaction to the cautious guidance could constitute an attractive buying opportunity for the recently high-flying stock.

Mike Ullman III, chairman and chief executive of Penney's, commented: "In 2007, we will build on what we have accomplished in executing our long-range plan strategies, with the primary objective of exceeding our customers' expectations every time they shop at JC Penney.

"We started this process with the recent introduction of our new brand positioning, Every Day Matters, through which we will form a deeper, more enduring relationship with our customers."

More details of Penney's plans will be unveiled in April. The company has already detailed one addition to its assortment, American Living, to be developed by Polo Ralph Lauren's new Global Brand Concepts and rolled out in spring 2008.

For the full year, net income advanced 6% to $1.15bn, or $4.96 a diluted share, from $1.09bn, or $4.26, in the prior year. Earnings per share from continuing operations picked up 27.4% to $4.88 from $3.83. Net sales rose at the same pace as net income, advancing 6% to $19.9bn from $18.78bn. The most recent year was 53 weeks versus 52 for the prior year.

By Arnold J Karr.