August 12, 2011 / 12:11 PM / 7 years ago

Penney gross margin slips on price-cutting

NEW YORK (Reuters) - J.C. Penney Co Inc (JCP.N) forecast weaker-than-expected third-quarter earnings as more price cutting threatened to further dent its gross margin, sending its shares down 1 percent in morning trade.

A pedestrian walks with a shopping bag from a JC Penney department store in New York March 2, 2010. REUTERS/Natalie Behring

The department store chain reported second-quarter profit in line with the average Wall Street estimate as merchandise available only at Penney stores boosted sales at its stores.

But early in the quarter, Penney found itself having to offer more discounts after sales were soft, lowering gross margin by 1.1 percentage points to 38.3 percent. The company said gross margin would also take a slight hit in the current quarter.

Penney CEO Myron Ullman, who is stepping down in November, said consumers are likely to remain stressed.

“The tumultuous last 10 days or so hasn’t given our core customer, the middle income family, any reason to be more confident,” Ullman said on a call with the investors.

U.S. consumer sentiment worsened sharply in early August, falling to the lowest index level since 1980, according to a survey released on Friday by Thomson Reuters/University of Michigan.

Unemployment has been above 9 percent for about two years now while wages have stagnated, curbing middle class and less affluent consumers’ ability to shop.

Penney 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.

Net sales were down 0.8 percent to $3.91 billion, largely because of its exit from its catalog business. Same-store sales were up 1.5 percent, a slower clip than Macy’s, Dillard’s and Kohl’s Corp.

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

Penney shares were down 1 percent at $26.56, while Kohl’s (KSS.N) were up 1 percent, and Macy’s (M.N) slipped 0.4 percent. The S&P 500 index .SPX was up 0.5 percent.

MARGINS UNDER PRESSURE

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

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.

Penney suffered dramatic sales declines during the recession. Sales are recovering, in part because of those higher end lines, but are still below 2008 levels.

Exclusive lines give shoppers a reason to choose one chain over another and lowers the risk of having to slash prices to stay competitive and take a hit to their gross margin.

But Wall Street Strategies analyst Brian Sozzi told Reuters that Penney has further to go than Macy’s or even Kohl’s in offering merchandise to entice shoppers to pay up.

“Penney has more exposure to selling basic items,” like white T-shirts, Sozzi said.

Macy’s, Kohl’s and Dillard’s all reported steady or higher gross margin for the second quarter.

Earlier this week, department store peers Macy’s, Nordstrom and Kohl’s 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.

U.S. retail sales in July posted their biggest gain since March, tempering fears that the world’s largest economy might be slipping back into recession. Excluding autos, sales increased 0.5 percent, well above forecasts for a 0.2 percent gain.

Penney, which is in the process of selling its outlet business, said it was offering voluntary early retirement packages to certain employees. The chain will say next quarter how many employees are eligible and what the costs might be.

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.

Reporting by Phil Wahba, editing by Gerald E. McCormick, John Wallace, Phil Berlowitz

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