Slowdown hits Penney harder than most retailers in 2Q

By Reuters
Posted Aug. 13, 2010 at 1:54 p.m.

J.C. Penney Co. forecast a full-year profit below Wall Street expectations and stoked concerns that it may need further discounts to clear merchandise built up last quarter, sending its shares lower.

Penney said its shoppers, who tend to have a lower household income and are more likely to turn to discount chains and dollar stores when budgets are tight, were vulnerable to weak economic conditions.“We are taking a relatively conservative approach to the economic climate and especially the moderate consumer,” Chief Executive Myron Ullman said on a call with analysts.

That view was also highlighted in forecasts Thursday from rival department store operator Kohl’s Corp. and upscale retailer Nordstrom Inc.

However, Penney has proved to be among the poorest performers in recent months, showing weaker sales growth compared with Kohl’s and Macy’s Inc.

Penney said Friday it expects earnings this quarter of 16 cents to 20 cents per share, below Wall Street forecasts of 24 cents.

Its 2010 profit forecast of $1.40 to $1.50 per share also fell short of estimates of $1.54.

Analysts expressed concern that Penney would be more likely to require discounts to sell its merchandise, as inventory levels were up 7.1 percent at the end of its second quarter and outpaced sales forecasts.

“J.C. Penney’s inventory position looks the least favorable amongst all the department stores we cover, particularly Macy’s,” J.P. Morgan analyst Charles Grom wrote.

Ullman said the company had stocked more merchandise partly to guard against container shortages in Asia that could disrupt shipments.

Penney shares fell 3 percent. Macy’s rose 0.4 percent while Kohl’s slipped 1.9 percent and Nordstrom tumbled nearly 6 percent.

Penney reported second-quarter net income of $14 million, or 6 cents per share, compared with a loss of $1 million, or nil per share, a year earlier.

Sales fell 0.1 percent, to $3.94 billion, with the drop attributable to the discontinuation of its Big Book catalogs. Internet sales were up 4 percent.

Analysts had been expecting a profit of 5 cents per share on sales of $4 billion, according to Thomson Reuters I/B/E/S.

Penney’s same-store sales were up 0.9 percent, below Kohl’s 4.6 percent gain and Macy’s 4.9 percent increase.

Last week, Penney reported an unexpected drop in sales at stores open at least a year in July as it slashed prices at the end of the month to lure shoppers. Ullman said the spike in discounting was “tactical” and would have a short-term impact.

But it expects to get a boost from its expansion of exclusive, more profitable product lines and forecast same-store sales to riseĀ  2 to 3 percent in the third quarter.

Last week, Penney became the exclusive retailer for Liz Claiborne Inc.’s namesake brand, and Ullman said the line was exceeding expectations. It will also open 16 more Sephora cosmetics shops at its stores and launch the fast-fashion MNG by Mango shop inside its stores.

Penney’s is also seeing better traffic at stores outside of shopping malls and plans to announce new locations soon. Ullman said on the call that traffic at its off-mall stores outperformed mall stores by 3.5 points during the quarter.

Penney, based in Plano, Texas, operates about 1,100 stores in the United States.

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