RETAIL J.C. Penney raises its profit forecast

The company is also taking steps to reduce its debt.
PLANO, Texas (AP) -- J.C. Penney Co. raised its profit forecast due to strong sales and said it would buy back nearly one-fourth of its shares and reduce debt with proceeds from the sale of Eckerd drugstores.
Penney said it expected operating profits of 21 cents to 23 cents per share in the May-July quarter. Analysts surveyed by Thomson First Call had expected 13 cents per share.
The department-store company said July same-store sales, or sales at stores open at least a year, rose 8.1 percent from a year earlier, helped by strong back-to-school sales. Same-store sales rose 7.1 for the whole quarter, said Penney, which had forecast increases in the low single digits.
Buying back stock
Plano-based Penney also said it would use its $1.1 billion in cash, $3.5 billion in proceeds from the sale of Eckerd drugstores and future earnings to buy back $3 billion in stock -- enough to reduce the potential common shares by 23 percent.
Penney said it would cut debt by $5.7 billion, including $3.4 billion in off-balance sheet debt tied to Eckerd leases. Penney announced Sunday it has completed the sale of Eckerd to CVS Corp. of Woonsocket, R.I., and Canada's Jean Coutu Group Inc.
Chief financial officer Robert Cavanaugh said in an interview that the debt-reduction steps were "like taking your mortgage debt and cutting it in half."
Along with rising profits at department stores, the changes would give Penney the flexibility to invest more heavily in the business, such as opening more off-mall stores over the next several years and return its debt ratings to investment-grade.
Indeed, shortly after Penney reported the July sales figures and balance-sheet moves, Fitch Ratings lifted its grades on about $5.2 billion in company debt, including raising $1.5 billion in bank loans to "BBB-," or barely investment grade.
Fitch, which had dropped Penney debt to junk status in late 2001, added a positive outlook, which could signal another upgrade.
Fitch analyst Philip Zahn said Penney had shored up its balance sheet and was showing signs of sustaining a turnaround in its department stores, which had been getting clobbered by supposedly more nimble competitors such as Kohl's Inc. and discounters.
"Kohl's is struggling a little bit at the moment, and Penney has some momentum," Zahn said.
Shares of Penney rose to $41.50 before closing Monday at $40.20, up 20 cents to a 52-week high on the New York Stock Exchange.

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