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Penney’s Warning Adds to Retail Gloom

Michael Barbaro and Michael M. Grynbaum|The New York Times
Saturday, 29 Mar 2008 | 10:24 AM ET

For retailers, doing everything right is no longer enough.

Over the last year, J. C. Penney rolled out a powerful new marketing campaign filled with heartstring-tugging commercials, it introduced a clothing and home décor line from Ralph Lauren, and it opened 50 stores.

But consumers are not biting — and, on Friday, J. C. Penney sharply cut its earnings forecast for the first three months of the year, by 33 percent, blaming the tough economy.

That fresh sign of distress in American retailing was reinforced by a report from the Commerce Department that consumer spending remained stagnant in February, growing at the slowest pace in more than a year because of the housing slump and a weak job market.

The dour economic data helped push all three major stock indexes down on Friday. The Dow Jones industrial average slipped 86.06 points, to 12,216.40. The Standard & Poor’s 500-stock index fell 10.54 points, to 1,315.22, while the Nasdaq composite index dropped 19.65 points, to 2,261.18

The slowdown at J. C. Penney bodes poorly for a wide range of retailers — and its profit warning appeared to drag down shares of Nordstrom (off 6 percent), Macy’s (6 percent) and Kohl’s (5 percent).

If Penney, a midprice chain shopped by middle America, is feeling the pinch of tightening wallets, investors reasoned, so will the rest of the retail industry.

“This is what a recession looks like,” said Adrianne Shapira, a retail analyst at Goldman Sachs. “We are bumping along the bottom.”

The chief executive of Penney, Myron E. Ullman III, said that “consumer confidence is at a multiyear low.”

He added, “J. C. Penney counts half of American families as its customers, and they are feeling macroeconomic pressures from many areas, including higher energy costs, deteriorating employment trends and significant issues in the housing and credit markets.”

The revised profit estimate from Penney was striking because after a decline starting last summer when the housing crisis began, its stock started to recover as consumers responded positively to new merchandise from designers like Mr. Lauren.

His new product line, introduced in February to rave reviews, features immaculate displays, with whitewashed picket fence walls and fake hydrangea in metal pails, and piles of polo shirts, floral bedsheets and paisley neckties.

“It’s designed by the greatest American designer and being sold at the best American department store,” Ken C. Hicks, president of J. C. Penney, said in a recent interview.

The Lauren line was the latest chapter in J. C. Penney’s remarkable turnaround over the last decade. The chain lost more than $900 million in 2003, and was nearly written off by Wall Street (and by middle America).

Since then, J. C. Penney has become a force in fashion. New in-store brands, like A.N.A., and East5th are considered as stylish as anything at Macy’s. And it has attracted big-name outside brands, like Liz Claiborne for women’s clothing and Sephora in the cosmetics department.

Last year, under the direction of Mr. Ullman, who once ran the luxury conglomerate LVMH Moët Hennessy Louis Vuitton as well as Macy’s, the company earned more than $1 billion.

“It’s clearly no longer your grandmother’s J. C. Penney,” said Ms. Shapira of Goldman Sachs.

But the falloff in consumer spending that began during the holiday season in 2007 only intensified during the first several months of 2008, and it has not spared J. C. Penney.

The chain said its first-quarter earnings would probably be 50 cents a share, compared with an earlier forecast of 75 cents to 80 cents a share. It estimates sales at stores open at least a year, a crucial yardstick in retailing, will fall by at least 10 percent in March.

Most retailers will report March sales next week. The numbers are not expected to be pretty. In January and February, monthly sales at stores open a year fell at just about every major department store, including Penney, Macy’s, Kohl’s, Dillard’s and Nordstrom.

It is unclear whether these stores will soon issue the same kind of earnings warnings as J. C. Penney. But none are expected to produce stellar earnings this quarter.

Asked if J. C. Penney was serving as an alarm bell for the retail industry, Ms. Shapira said it seemed a little late for that.

“The alarm bell has been deafening for months now,” she said.

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