Penney turns a profit in 2Q but cuts outlook amid worries about consumer spending

J.C. Penney cuts outlook on consumer weakness

NEW YORK — J.C. Penney Co. cut its profit outlook for the rest of the year, a sign of jitters that Americans, still stinging from the recession and worried about jobs, aren’t going to spend more any time soon.

The reduced outlook came Friday as Penney reported a second-quarter profit as it benefited from tight inventory controls and exclusive store-label brands. Shares fell 90 cents, or 4.7 percent, to close at $19.82 after hitting a 52-week low of $19.79 earlier in the session.

Myron Ullman III, J.C. Penney’s chairman and CEO, told analysts during a conference call Friday that while earlier in the year retailers recognized they wouldn’t be able to rely on the “consumer economy” to drive business, now he says it could be a “drag” given the slowdown and Penney’s will have to work even harder to woo shoppers to buy in the final months of 2010.

Ullman said J.C. Penney’s shoppers, who are primarily middle income, are bearing the biggest brunt of the economy’s woes as they grapple with tight credit, job losses and a protracted housing slump.

“Our customer tends to be more urban, more ethnic and more impacted by the economy than many others in the overall retail landscape,” Ullman said.

With Penney a bit more concerned about consumer spending than earlier in the year when it ordered fall and holiday goods, Ullman said that the chain will look “very carefully” at revising inventory levels for the rest of the year, though he doesn’t see any major issues yet.

Penney, based in Plano, Texas, earned $14 million, or 6 cents per share, in the three months ended July 31. That compares with a loss of $1 million, or break-even per share, in the same quarter last year.

The second-quarter 2010 results included a charge of about 5 cents per share related to a debt buyback completed in May.

Revenue was $3.94 billion, down 0.1 percent from a year ago. Revenue at stores open at least a year rose 0.9 percent compared with a year ago. The measure is a key indicator of a retailer’s health because it includes sales at existing stores while excluding sales at newly opened locations.

Analysts surveyed by Thomson Reuters expected 5 cents per share on revenue of $4 billion.

After a suprise pickup in overall consumer spending earlier in the year, most retailers have seen a slowdown since April as the economic recovery is stalling and the job market remains stagnant.

With shoppers watching their spending, any sales gains are coming at the expense of other retailers. Department stores, in particular, are fighting a fierce battle for consumer dollars in which Penney appears to be falling short.

To lure shoppers into their stores, Penney and its rivals like Kohl’s Corp. and Macy’s Inc. have been adding more exclusive fashions.

This month, Penney became the only U.S. retailer to sell Liz Claiborne and Claiborne women’s wear, except the Isaac Mizrahi-designed Liz Claiborne New York brand, which went to QVC. Ullman said that so far the clothes have received strong consumer reception.

This fall, Penney will become the only department store selling MNG by Mango, a European clothing brand, a big coup as fast-fashion players have been a big threat to department stores.

Penney said back-to-school selling is off to a “good start,” fueled by new brands such as Uproar and Supergirl by Nestle and exclusive styles such as Olsenboye and RS by Sheckler. The strongest sellers were in men’s clothing and women’s accessories during the second quarter, the chain said.

Still, tough competition is taking a toll.

Last week, Penney reported a surprise 0.6 percent drop in July revenue at stores open at least a year and had warned that its second-quarter profit would come in at the low end of its forecast. Competitors Macy’s and Kohl’s, by contrast, reported rising sales.

Penney said Friday that it expects revenue at stores open at least a year to be up 2 percent to 3 percent in the current quarter. Total sales should increase one percentage point less, which means anywhere from 1 to 2 percent, because Penney stopped publishing its Big Book catalogs.

For the current quarter, earnings per share should be in the range of 16 cents to 20 cents. Analysts had expected 24 cents per share.

For the year, Penney expects earnings per share to be between $1.40 per share and $1.50 per share. Analysts expect $1.54. In May, Penney had said it expected $1.64 for the full year.