Penney sees tepid holiday, to lay out turnaround

J.C. Penney Co Inc issued a tepid holiday sales forecast compared to its rivals and said it expects further decline in gross margin, showing how much work lies ahead of new CEO Ron Johnson as he remakes the 109-year-old retailer.

The department store chain, whose shares were down 1.3 percent in midday trading, forecast sales at stores open at least a year would be flat to up slightly over the holiday quarter. In contrast, Kohl's Corp (KSS.N) last week forecast a same-store sales rise of 2 to 4 percent, while Macy's expects an increase of 4 to 4.5 percent.

On his first conference call with Wall Street analysts, Johnson said he wants to "transform" Penney, not merely improve it.

"It is time to assert leadership, reclaim our birthright and become America's favorite store," said Johnson, who is widely acclaimed for building Apple Inc's (AAPL.O) successful chain of stores. He took the reins on Nov. 1.

Johnson stayed mum on the specifics of his plan but said he would lay it out at a Jan. 25 investor meeting in New York. He did allude to changing Penney's pricing strategy, which currently relies heavily on markdowns.

Johnson, who has been tapping former colleagues from Apple and an earlier stint at Target Corp (TGT.N) as he builds up his management team, said Michael Kramer, most recently CEO of clothing maker Kellwood Co, would start as chief operating officer on Dec. 5.

Penney's gross margin, which gauges the profitability of items sold, fell 1.6 points to 37.4 percent in the third quarter as the company faced tepid shopper demand and cut prices. Penney said it expects gross margin to fall slightly in the current quarter.

The retailer reported a third-quarter net loss of $143 million, or 67 cents per share, compared with a profit of $44 million, or 19 cents per share, a year earlier. Excluding charges such as management transition expenses, Penney had a profit of 11 cents per share.

Overall sales fell 4.8 percent to $3.99 billion, hurt by the company's exit from the catalog business.

Penney expects fourth-quarter adjusted earnings of $1.05 to $1.15 per share, largely below the average Wall Street forecast of $1.14, according to Thomson Reuters I/B/E/S.

Penney shares were down 45 cents at $33.47 in midday trading.

FALLING BEHIND RIVALS

During each month of the third quarter, Penney's same-store sales fell and missed Wall Street forecasts. Executive Chairman and ex-CEO Myron Ullman blamed shoppers' "limited discretionary spending capability."

In all, same-store sales were down 1.6 percent for the quarter. Penney had forecast a rise of 2 percent to 3 percent.

Kohl's, which caters to a similar clientele, reported same-store sales gains in the quarter, showing the importance of high-profile exclusive merchandise, like its new lines by entertainers Jennifer Lopez and Marc Anthony.

"They didn't have anything new," Morningstar analyst Paul Swinand said of Penney. "Their core customer is in a tough spot."

Kohl's stores are newer, and fewer are located in malls, where shopper traffic still lags, Swinand added. Both chains operate some 1,100 stores. Last year, Kohl's overtook Penney in terms of overall sales.

After Kohl's August sales disappointed Wall Street, that chain said it would lower prices on its most inexpensive items, adding to the pressure on Penney.

In the third quarter, Penney did not benefit from a splashy new launch such as Kohl's new lines or Macy's Inc (M.N) temporary collection with designer Karl Lagerfeld. But during the quarter Penney did buy the Liz Claiborne brand outright. It has said the Claiborne brand is selling well.

Penney continued to build out new locations within its stores for Sephora's cosmetics boutiques and MNG by Mango's trendy clothes, a central plank of its strategy to attract younger, more fashion-conscious shoppers. There are now 500 Mango and 308 Sephora stores within Penney's stores.

(Reporting by Phil Wahba in New York; editing by Maureen Bavdek and John Wallace)