JC Penney posts flat 2Q profits because of aggressive markdowns

NEW YORK, N.Y. – J.C. Penney Co. reported a flat second-quarter profit on Friday as the department store retailer aggressively marked down prices on fashions to get its middle income shoppers to keep spending in an increasingly uncertain economy.

The retailer, based in Plano, Texas, issued third-quarter profit guidance that was below Wall Street estimates.

Its shares fell 85 cents, to 3.2 per cent, to $25.98 in premarket trading.

The department store chain reported net income of $14 million, or 7 cents per share, for the three months ended July 30. That compares with $14 million, or 6 cents per share, a year ago.

Revenue edged down slightly to $3.91 billion from $3.94 billion in the year-ago period. Revenue at stores opened at least a year rose a modest 1.5 per cent for the quarter. The measure is considered a key indicator of a retailer’s health.

Analysts had expected earnings of 10 cents a share on revenue of $3.91 billion for the quarter.

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The department store operator, like many retailers catering to middle-to-lower-income shoppers, faces increasing uncertainty heading into the two most important seasons of the year – back-to-school and the winter holiday season.

Shoppers are paying more for gas, groceries and now stores are passing along higher prices on clothing to offset higher costs in raw materials. But worries are increasing that the economy is heading for a double dip recession. The Standard & Poor’s downgrade of federal debt a week ago has increased turbulence in the stock market and rattled shoppers.

“The challenging economy continues to impact the moderate consumer,” said Myron E. Ullman III, chairman and chief executive in a statement.

In a worrisome sign, Penney said that gross margins declined to 38.3 per cent in the quarter from 39.4 per cent in the year-ago period as it was forced to promote more aggressively early in the quarter.

However, Ullman said the company has made “strides” in cutting expenses, expanding merchandising initiatives and improving sales productivity in the stores.

Like many department stores, J.C. Penney has been expanding its assortment of exclusive merchandise. Last year, it became the only U.S. retailer to sell Liz Claiborne and Claiborne women’s wear, though the Isaac Mizrahi-designed Liz Claiborne New York brand went to QVC. It’s also the only department store selling MNG by Mango, a European clothing chain.

Penney has cut costs by closing some stores, outlets and a call centre. It is also wrapping up the shutdown of its catalogue business

The company said that it expects revenue at stores opened at least a year to be up anywhere from 2 per cent to 3 per cent for the third quarter. It also noted that its gross margin rate is expected to be down slightly for the same period compared with the year ago.

It forecast that earnings per share should be in the range of 15 cents to 20 cents for the third quarter. Analysts had expected 27 cents per share.