Aug 12, 2011
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Penney issues weak forecast

Aug 12, 2011

NEW YORK, Aug 12 (Reuters) - J.C. Penney Co Inc (JCP.N) forecast weaker-than-expected third-quarter earnings and further erosion in its gross margin, sending its shares down 3 percent in premarket trade. The department store chain reported second-quarter profit in line with the average Wall Street estimate as merchandise available only at JCPenney stores boosted sales.

JC Penney
J.C. Penney

Discounting also helped sales but cut into profit margins, and the company said gross margin would also be hit in the current quarter.

Penney, whose shoppers are seen as more exposed to an economic slowdown than rival Macy's Inc (M.N) or higher-end chain Nordstrom Inc (JWN.N), expects sales at stores open at least a year, or same-store sales, to rise between 2 percent and 3 percent in the third quarter.

But Penney forecast earnings per share in the current quarter will range between 15 cents and 20 cents, below analysts' average forecast of 23 cents.

Earlier this week, department store peers Macy's, Nordstrom and Kohl's Corp (KSS.N) all raised their profit outlooks and forecast strong sales for the rest of the year. Late Thursday, Dillard's Inc (DDS.N) reported quarterly profit more than doubled.

Penney in recent years has worked to remake itself into a fashionable destination with exclusive lines such as Liz Claiborne (LIZ.N) clothing and stores-within-its-stores for cosmetics seller Sephora and Spain's fast-fashion chain Mango.

Macy's and Kohl's credited their exclusive lines for their sales gains.

But Wall Street Strategies analyst Brian Sozzi told Reuters that Penney has further to go in offering merchandise to entice more affluent shoppers and said the forecast of lower gross margins was worrisome.

Exclusive lines give shoppers a reason to chose one chain over another and lowers the risk that retailers will have to slash prices to stay competitive.

Penney CEO Myron Ullman, who is stepping down in November, said in a statement that "the challenging economy continues to impact the moderate consumer."

Early in the quarter, Penney found itself having to offer more discounts after sales were soft, lowering gross margins by 1.1 percentage points to 38.3 percent.

Penney suffered dramatic sales declines during the recession. Sales are recovering but are still below 2008 levels.

In June, Penney announced that Apple Inc's (AAPL.O) senior vice president of retail, Ron Johnson, will become CEO after Ullman steps down. Ullman will become executive chairman of the board.

The company reported that second-quarter net income was little changed from a year earlier at $14 million, or 7 cents per share. That was in line with Wall Street analysts' average forecast, according to Thomson Reuters I/B/E/S.

As previously reported, net sales were down 0.8 percent to $3.91 billion, while same-store sales were up 1.5 percent, a slower clip than Macy's, Dillard's and Kohl's.

Penney shares fell to $26.00 in premarket trading from Thursday's New York Stock Exchange close of $26.83.

(Reporting by Phil Wahba, editing by Gerald E. McCormick and John Wallace)

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