J.C. Penney, Kohl's predict tough holidays, both lower forecasts

MILWAUKEE -- Retailers J.C. Penney Co. and Kohl's Corp., whose middle income customers are struggling amid a souring economy, offered a bleak outlook for the holiday quarter as they reported a drop in third-quarter profits.

Plano, Texas-based Penney reported third-quarter profit fell 9 percent, hurt by weak sales in September and October.

Kohl's, based in Menomonee Falls, Wis., said its profit dropped 14 percent, with a double-digit dip in sales of outerwear, sweaters and other cold-weather items during the unseasonably warm fall.

The showings don't bode well for the retail industry in the all-important holiday season, said David Heupel, portfolio manager for Thrivent Investment Management Inc. in Minneapolis. Rival Macy's Inc. said Wednesday it expects lower same-store sales for the year.

"This solidifies it's really going to be a difficult holiday season," he said.

Both Kohl's and Penney reported drops in same-store sales, or sales at stores open at least a year, a key indicator of retailer health. Kohl's reported a 2.6 percent drop, while Penney's fell 3.5 percent.

"We think people expected bad news, but this may be a bit more than was broadly expected," Dana Cohen, an analyst for Banc of America Securities, said in a note to clients.

Penney's shares hit a new 52-week low below $44 a share before closing down $2.40, or 5.14 percent, to $44.33.

Kohl's reported its earnings results after markets closed. Kohl's shares, which had fallen 46 cents to $48.92 in regular trading, dropped 72 cents, or 1.5 percent, in after-hours trading.

In the quarter ended Nov. 3, Penney's earnings fell to $261 million, or $1.17 per share, from $287 million, or $1.26 per share, a year earlier. Excluding a gain of 14 cents per share from state and federal tax benefits, net income was $1.03 per share.

Analysts, who usually exclude such one-time items, expected a profit of $1.01 per share, according to Thomson Financial.

Penney was able to beat Wall Street's profit target because it sharply lowered expectations after missing September sales goals.

Third-quarter revenue fell 1 percent to $4.73 billion, below the $4.76 billion forecast of analysts surveyed by Thomson.

Penney said it expects to earn $1.65 to $1.80 per share in the fourth quarter, down from its earlier forecast of $2.41 per share. Analysts were predicting $1.98 per share. The company said same-store sales would decline by a low-single digit percentage.

Penney Chairman and Chief Executive Myron E. "Mike" Ullman III was quick to point out that the slump is a result of a weakening economy and troubled housing markets. The company, he said, was not doing anything wrong.

"It's not as if we got dumb all of a sudden," Ullman said.

But the retailers are going to have to start thinking if they want to keep their inventories low and their sales high, Heupel said. He predicted there's room for lots of promotions and sales this holiday season, as a way to lure customers into stores.

Kohl's President Kevin Mansell said the holiday season would be "very promotional" and he's already seen that happen with competitors.

"I think we watched the promotion activity in the third quarter and that's become much more heated, and that just a fact, and so we have to be prepared to do so well," he told investors on a conference call.

Kohl's said it earned $194 million, or 61 cents per share, in the three-month period ended Nov. 3. That compared with $224.5 million, or 68 cents per share, a year ago, and just beat analyst expectations of 60 cents a share, according to a poll by Thomson Financial.

But sales fell short of analyst expectations of nearly $3.9 billion. Sales were up to $3.83 billion for the quarter from $3.65 billion in the year-ago period.

Kohl's predicted same store sales would fall as much as 2 percent in the fourth quarter, so it lowered its earnings expectations to a range of $1.45 to $1.51 per share. The company also lowered its full-year guidance for earnings per share to a range of $3.52 to $3.58, down from a range of $3.77 to $3.87.