J.C. Penney (NYSE:JCP) Enjoys Solid Quarter on Cost-cutting and Inventory Control

The story coming out of the retail sector for the fourth quarter and 2009 is those companies, like J.C. Penney's (NYSE:JCP), who cut costs and lowered inventory, have come out very good in a difficult economic environment in the United States.

Like other retailers, the key now is to generate growth while keeping costs under control. For J.C. Penny's, that will be done by drawing customers from their competitors. 

Their latest quarter, which ended on January 30, J.C. Penney enjoyed a profit of $200 million or 84 cents a share. While down from the year before, where they posed a $211 million profit, it wasn't bad when taking into consideration the tough economy they faced.

Probably the best news coming out of the performance for J.C. Penny was they were able to increase their gross margin from 34.6 percent to 38.2 percent for the quarter.

So while even though they cut back on inventory and focused on cutting costs, they were able to do that without having to overcompensate in the discounting area. That means they've positioned in the minds of their customers not to expect steep discounts as the norm from them. Once the U.S. economy really does start to recover, that is a good place to be for them.

Chief Executive Officer Myron E. Ullman III says their growth strategy will focus on marketing their exclusive brands even stronger, improve its Internet presence by bring more resources to bear on it, and to improve their physical stores to increase same-store sales.

The question still remains whether the decision to not compete on price can be held by Penny's. If many of their competitors decide to go that route to generate revenue and keep traffic at their stores, it'll be difficult for Penny's to hold that line if that's what happens.

If the results of Wal-Mart (NYSE:WMT) are an indicator, it'll be tough to implement the plan to generate profits by marketing their exclusive brands. That's the right thought in normal economic conditions, but I think news reports of an economic recovery in the United States are largely inflated, and people continue to hold tight to their money. Even Wal-Mart sales dropped in the U.S. during the last year, showing the weakness remains.

Penny's and their competitors have pretty much cut to the bone for cutting costs, there's really not much more any of them can do, so competition for customers will be furious in 2010, and to think brand names rather than discounts will drive growth is a bold statement and strategy, but may be tough to accomplish.