JC Penney's profit warning sends its shares to an all-time low; Macy's, Kohl's head lower

Key Points
  • J.C. Penney on Friday morning trimmed its 2017 profit and comparable sales forecasts.
  • The department store chain has been discounting heavily ahead of the holidays to get rid of excess inventory.
  • The retailer's shares tumbled more than 20 percent on the news.
JC Penney shares skid more than 20% after the retailer slashed its 2017 earnings forecast

J.C. Penney had a disappointing update to share Friday morning, sending the department store chain's stock prices tumbling to an all-time low.

Penney's slashed its 2017 profit and comparable sales forecasts, explaining that the company has been discounting heavily ahead of the holidays to get rid of excess inventory.

Penney's shares fell more than 20 percent on the news, reaching an all-time intraday low of $2.75 apiece. The stock was last trading closer to $3 per share.

The update also sent shares of retail rivals Macy's, Kohl's and Nordstrom lower, on fears that Penney's downgraded outlook could mean worse news for the broader sector.

"With a sharper and more disciplined focus on inventory management, we are taking a comprehensive approach to assessing the effectiveness of our inventory positions to make swift, informed decisions that promote faster inventory turn and higher productivity levels," Penney's Chief Executive Marvin Ellison said in a statement.

"Therefore, in the third quarter, we took the necessary steps to accelerate inventory liquidation primarily across all apparel divisions, which increases available funding to invest in new and trending merchandise categories," Ellison added.

Penney's is now calling for an adjusted loss of 40 to 45 cents per share in the third quarter, compared with analysts' average estimate of 18 cents, according to Thomson Reuters.

The retailer expects full-year same-store sales, a key metric monitored by investors, to be flat at best. Previously, Penney's had forecast comps climbing as much as 1 percent.

The department store chain has also cut back its full-year profit forecast, now calling for adjusted earnings of 2 to 8 cents per share, down from 40 to 65 cents.

In a push to grow sales, Penney's said it's been focused on the women's apparel category, adding more "casual and contemporary" options. But competition for female shoppers' dollars stems from an increasing number of players, including Lululemon, TJ Maxx, Gap, Nike and even Amazon.

In turn, Penney's has also worked on beefing up other divisions, like those for makeup and appliances.

"While we acknowledge the positive work JCP is doing to become less apparel reliant (with initiatives like the expansion of home, appliances, beauty, and salon) the sector faces intense secular headwinds as mall traffic wanes and the shift to e-comm should also continue to weigh on profitability," Jefferies analyst Randal Konik wrote in a note to clients.

"We continue to see branded retail as more resilient from secular headwinds, as they can better fend off promo pressures and will be destinations for the consumer," Konik added.

Ellison, at the helm of Penney's, said the company needed a refresh.

"Although these actions will create a short-term negative impact to cost of goods sold and earnings, long term, we firmly believe it was the right decision for the Company as we transition into the fourth quarter and fiscal 2018," he explained.

Moving forward, Penney's Chief Financial Officer Jeffrey Davis will look over the company's pricing and planning policies, "to streamline ... pricing, promotion and markdown strategies."

Heading into the holidays, and a warmer winter at that, retailers' ability to perform is being called into question.

"We read this pre-announce as negative for traditional department stores such M, KSS, JWN," Evercore ISI analyst Omar Saad wrote in a Friday note to clients.

"While management did not specifically call out weather in the quarter, we think the warm weather over the past two months also adds increased risk to comp and/or gross margins in September / October for the traditional retailers," Saad added.

J.C. Penney is set to report third-quarter earnings on Nov. 10.